The latest IPCC report is about three thousand pages of what seems to be the same message we’re used to hearing on climate change: we’re still not doing it right. However, hidden in the mix is a curious bright spot – some countries are on the right track, building economies which are growing and decarbonising.
The report notes that 24 countries managed to persistently reduce their CO2e emissions between 2008 and 2018. Unsurprisingly, the vast majority of these 24 countries are developed economies, and also in Europe – they include Germany, France, The UK, Italy, and The Netherlands. The US also features. These changes weren’t related to economic decline – the countries in question are reducing their emissions even while they grow.
This might prompt one to ask the question – what’s working? The answer seems to be national policy commitments supported by private sector innovation and finance commitments, particularly policies which support innovation while also driving demand for low carbon products and services.
However, for us this also prompted a second question – what happens if trajectories keep diverging in different regions? If Europe and the US go faster, and others don’t?
Regional divergence may mean some get a shot at green growth while others miss out
A complaint we hear from companies and investors in a number of regions is that although they have a desire to invest in transition – by establishing new products or investing in growth sectors which provide low carbon solutions – they can’t find customers willing to provide sufficient demand, or a pipeline to invest in. Where low carbon solutions are in place and viable (such as renewables), they’re often oversubscribed.
In our experience this refrain varies by region. When Pollination surveyed asset owners recently on their investment intentions regarding climate change, one region stood out. Investors focussed on Europe were having far fewer issues finding opportunities – in some cases they were considering putting even more capital at risk. Policy in the region is driving rising demand for climate change solutions – products and companies which make decarbonisation possible – and this demand is driving growth in new sectors and in turn facilitating investment. It’s likely not a co-incidence that some of the world’s most powerful (and valuable) decarbonisation transformations come from these same regions. Neste, Oersted, and Tesla are all lionised transition opportunity plays which operate out of these markets.
If we continue to see transition pathways diverging, the relative speed of transition is likely to become an issue of regional competitiveness. A slow transition in some regions will force companies, customers, communities and investors in those regions to grapple with more difficult decisions. A fast transition in other regions will mean access to a stable operating environment and growth opportunities, and increasing access to capital.
The solutions and companies developed in regions experiencing rapid transition are likely to be the first on the ground when other regions begin to decarbonise as well – capturing an out-sized share of transition opportunities globally.
Successful transitions are founded in demand
A common feature in the green growth story for the countries above is demand. Electric vehicle (EV) markets in different regions are a prime example of the ways in which demand can catalyse or cripple transition.
A largely absent policy framework for EVs in Australia has led to limited demand, and as a consequence limited availability, infrastructure and uptake. Those who have considered buying an EV in the last few years know that this has forced customers to shell out additional cash for a limited range of vehicles with variable infrastructure support.
In this setting companies who might otherwise choose to develop business models based on EVs which are emerging elsewhere can’t afford to make the switch or dedicate capex. Investors who might put money behind EV-related solutions don’t see the demand needed to support new business models. Some consumers, companies and investors make it work, but many have put EVs in the too-hard basket for now.
The solutions and companies developed in regions experiencing rapid transition are likely to be the first on the ground when other regions begin to decarbonise as well – capturing an out-sized share of transition opportunities globally.
Because of a lack of demand, the conversation becomes a chicken and egg problem – companies can’t demonstrates demand and secure investor support, and investors can’t find pipeline. The cycle continues.
On the flip-side, in some regions a policy driven transition focussed on incentivising sales of EVs has generated the demand needed to support the growth of the industry. The rapidly growing charging networks, EV ride-sharing models, and electric transport start-up industries we see in the EU don’t just make EVs easier to access for customers. They also represent a growth story which is global and regional, and which cuts through the chicken and egg problem.
There is more than one way to create demand
Transition can be a growth story for Australia. Our conversations about decarbonisation opportunities often focus on green hydrogen and renewable exports, but a key feature of transition is that it touches a wide range of sectors.
However, to drive this kind of growth we need to stimulate demand – to create a pipeline which pulls opportunities from ideation to investment.
Many of the countries in the fast transition group have used policy settings to create the demand environment needed to drive the development of new commercial ecosystems. We may have a policy opportunity approaching us, depending both on the outcome of the election and on whatever the winning party learns in the process. While technology-push policy (focussed on spending on new technologies, R&D and training) has a role to play, establishing demand-pull policy is critical. We have history with demand-focussed policy (the RET and the ERF are both demand-focussed), and we might shortly have an opportunity to extend these into other sectors.
However, as is often the case, policy isn’t the only lever available to us. Companies and investors are focussed on decarbonisation targets, which are creating a wave of decarbonisation efforts across developed markets globally. These targets can be extended to include demand. Procurement targets can specify that a certain portion of the products a company buys will also be low carbon by a certain date.
These types of targets are already supporting demand in a number of cases offshore. Two years ago an executive at a global steel maker expressed to us that once their customers had low carbon targets in place for procured goods, the question of investing in solutions became a no-brainer. With the demand pipeline in place, commercial logic came into play and the chicken and egg problem vanished. Where policy doesn’t create demand, companies and industries can step into the breach.
Two years ago an executive at a global steel maker expressed to us that once their customers had low carbon targets in place for procured goods, the question of investing in solutions became a no-brainer.
The transition to a lower carbon economy is increasingly appreciated not only as an historic challenge but as a massive opportunity, but it is one that regions are pursuing at increasingly variable speeds. Demand for low carbon alternatives forms a foundation for this transition opportunity – it can drive decarbonisation while creating the space for growth and for investment.
Where governments fail to create this demand, regions risk being left in the dust as other economies accelerate their transition efforts. We have may shortly have an opportunity to drive demand via policy, but policy isn’t our only lever. The private sector doesn’t have to wait on government, but can instead create its own conditions for green growth and accelerate transition along the way.
