Think Again

The path to net zero

September 08, 2021 Macquarie Asset Management Episode 22
Think Again
The path to net zero
Show Notes Transcript

The first in a series of discussions with Peter Durante, Head of Technology and Innovation at Macquarie Asset Management, on climate change and energy innovation, leading to the 26th UN Climate Change Conference of the Parties (COP26) which begins October 31 in Glasgow, Scotland.   

For supplementary information on the topics discussed in this episode, visit the following third-party resources: 

  1. Intergovernmental Panel on Climate Change (IPCC) - Sixth Assessment Report
  2. NASA’s intro to climate change
  3. International Energy Agency – ‘Net Zero by 2050’
  4. BloombergNEF 2021 ‘New Energy Outlook’
  5. Energy efficiency – Rocky Mountain Institute
  6. The Jevons Paradox 

Have a question for Peter or our podcast? E-mail

Relevant disclaimers and other information can be found here.

 Peter Durante [00:00:04] Good day, everyone, and thanks for joining the first in our podcast series on energy transition during the lead up to twenty six climate talks in November. The series is going to primarily focus on a raft of technologies that we need to help decarbonize the world economy and help explain the basics and some of the key. So what questions for the solutions that investors and others would have? My name's Peter Durant and I head up our Global Technology Innovation Team within Macquarie Asset Management, part of the broader Macquarie Group. And I'll be your host for these sessions. To come to the team, as we call it, functions a bit like an internal thing. We look at over 100 different technologies across energy, transport, data, digitalization, automation, agriculture, telecoms and more. And then we sort of inform or form the house views on various topics which we then apply during strategy, origination, investment, due diligence and asset management within the portfolio company of over one hundred infrastructure companies that we own around the world. As some of you know, Macquarie is committed to have its activities be in line with net zero by 2050. And Macquarie Asset Management, part of the business I'm in, as committed to be net zero by 20, 40 to 10 years ahead of the timeline set out in the Paris climate accords. Talk more about those later. So part of our role is to help work with our portfolio companies and our investment in asset management teams and our team to map out how we're going to do this. So throughout these podcasts, I'm going to be joined by colleagues from the team, from across the broader support group, as well as others from industry and the research community. As we go through the solutions set of technologies, these topics are usually quite involved. So what we're going to try and do is include some resource, useful resources and references in the show notes for you if you're interested in more. But to start it off with, I figured that it made sense to look at first principles and map out some of the the foundational what and why questions. So what exactly is climate change and anthropogenic global warming? What do we know about it? Why is it driving so much action? What is the policy response? What is COP 26 and why should investors care about it? And what should they be on the lookout for these climate talks in November? So we will have a separate episode talking specifically about policy in COP twenty six. But to begin with, we're going to start talking about climate change itself. So here to help me with the first set of questions is Professor David Viner. David is the coordinating and lead author for the Intergovernmental Panel on Climate Change for the IPCC and the head of the Green Advisory Green Impact Advisory Team, of course, Green Investment Group. David, welcome that page. David, could you maybe to begin with, give us an overview in terms of me and my fellow known scientists can understand of what climate change or global warming is and how we know what's happening and why do we care about this? 


David Viner [00:02:43] Yeah, thanks for the. Climate change or global warming? These changes are these terms are interchangeable. This has been known among the scientific community going back to about 1860, a physician, John Schindler, marriage physician, worked out that certain gases in the atmosphere had what we what we term a radioactive water, that they trap heat within the atmosphere. The problem was being carbon dioxide, methane, water vapor. And then over the following century, in the early nineteen hundreds of Swedish scientists, Phonte Irenaeus, postulated that the burning of coal would contribute to an increase carbon dioxide in the atmosphere, although that can be measured at times. In the 1950s, Keeling put together the observatory on Mauna Loa to measure atmospheric carbon dioxide in the atmosphere, and it showed very rapidly that CO2 was increasing. We also know that we could measure what the CO2 concentrations and other gases were going back in time through environmental evidence from ice cores, tree rings, etc. And that gave us an indication that the changes we were starting to see, even looking back into the 1960s and 1970s, starting to be large and of concern to the scientific community. And then in the 1980s, the Climate Research Unit, scientists at the Climate Research Unit put together for the first time the global temperature curve, and that showed that the warming of the planet in the recent decades, but also the variability of the climate system over the previous hundred years. So we're starting to put together the pieces of the science behind climate change. And then in 1998, in the late 1980s, the scientific community supported by a number of governments around the world, UK government, the US government. Decided to get together and set up the Intergovernmental Panel on Climate Change, an Intergovernmental Panel on Climate Change, first reported in 1990. So the science has been put in place and the evidence has been building up over time. And in the recent IPCC report, the sixth assessment report from working with one month is six months building upon vast amounts of evidence that have been produced today by the scientific community evidence and go through a very rigorous peer review process. And the IPCC report themselves are extremely detailed. The authors are chosen by, well, governments or well, governments of whatever persuasion. The content of the report is designed by the government and has input from the government. So this is a governmental process. And then in constructing the reports, all the available literature is reviewed by the scientific community that the report goes through different iterations and the governments at the end of the day signed this report. So when the IPCC working one reported in August this year of August 2021, the summary for policymakers, they did the document at the top of the report. We undertake the line by line Ivy by governments. So this is a thorough. Authoritative statement to the climax of how the climate scientist and we know the key headline from this report is that it is unequivocal that human influence is warm, the ocean atmosphere, ocean of land, and that widespread and rapid changes in the atmosphere, ocean, cryosphere and biosphere have all occurred and that these changes are unprecedented over many centuries and if not thousands to a hundred thousand years. So we have in place a robust scientific evidence that is indicating that human activity through the burning of fossil fuels. Widespread changes in land use are increasing the concentrations of greenhouse gases in the atmosphere, and that that is leading to the unprecedented warming that we've seen over the last few decades. And we will continue to see over the coming centuries. 


Peter Durante [00:06:44] Thanks for that. So the IPCC report and of the language people would have heard and in discussions or on things like these threshold targets that we're looking at, whether it's two degrees of warming or one and a half degrees Celsius of warming or three degrees Celsius warming, can maybe walk us through a little bit about what those targets are and why they're relevant. What's the difference between where we are now, one point five to four, etc.? 


David Viner [00:07:09] So those targets are important. They are not arbitrary targets based upon the scientific evidence around the impacts of climate change and irreversibility of those impacts. So in the third and fourth assessment report of the IPCC, which reported in the two thousands, the term dangerous climate change was accepted by the governments. It represents that. And we identified that the scientific community I've been fortunate enough to be part of the scientific community for the last 30 years now, and I've been involved in five of those six assessment reports that the. Threshold of dangerous climate change was about two degrees, maybe below, maybe a bit higher, but the evidence points to our two degrees of warming above pre-industrial and pre-industrial is the start of the industrial revolution, which we will look at at about 1750. So that. That above two degrees, we would see dangerous, irreversible impacts of climate change, so irreversible melting of alpine glacier systems loss, a complete loss of the world's coral reef systems, and then above two degrees and into three degrees of global warming, we would see major changes in discontinuities of the climate system, a breakdown in the what we call the firm Halime Circulation or the Gulf Stream, the release and melting of the permafrost, irreversible melting the permafrost which would release. Vast amounts, more CO2 and methane been locked up in the in the permafrost over the last many thousands of years, the irreversible melting and the continued melting of the large ice sheets of Greenland ice sheet and the Antarctic ice sheet. So these two degree threshold was based upon scientific evidence at Copenhagen in Paris in 2015, the Communist Party, the COP 21, the small island states and many other exposed countries wanted to push this level down with the scientific community identified one point five degrees as really the the target that we should keep below. But bearing in mind we are already about one degrees, one point one degree Celsius of global warming. So these targets, one and a half and two degrees based upon scientific evidence above which we will start to see many irreversible changes in the climate system, in the biosphere and human systems as well. So this is why we these are important at the moment. We're on track to be if we carry on with the emissions profile moment on track before degrees, who not five degrees of global warming by the end of this century, that will lead to Long-Term Irreversible changes in the ocean system that the oxidize fictionalization of the ocean system increase acidity of the ocean system and sea level rise irrespective of what threshold we reach that the pathway now on sea level rise is irreversible and many centuries, if not millennia, to come because of the inertia of the ocean system, some 90 percent of the energy trapped by the greenhouse gases into the ocean system push deep down into the ocean system, and it will take many centuries and millennia to manifest itself. So we are committed already to some long term, irreversible changes. But we know from the scientific evidence if we keep below one point five degrees, which is very challenging, and if we keep below two degrees, which is still challenging, but less so, we will prevent many of the worst impacts of climate change that kind of about likely to occur. 


Peter Durante [00:10:52] So that's a pretty gloomy picture, to be blunt, and certainly having read through the IPCC reports thus far and many others. Clearly, they all share that outlook. The general's eyes that that I tend to hear in the literature is that, well, it's pretty it's pretty unlikely that we'll get emissions down fast enough to be on track for one point five. So we might be on track for two. We're on track for three. I guess one of the questions, though, is I hear language, which for me drives me a bit a bit mad when I hear that. Well, if if we go over this threshold, well, then we might as well just give up and just worry about adaptation. So is the difference between two degrees C and three degrees C a linear thing, or is this start to become really exponential? And even if we overshoot, is there potential to say, well, instead of just net zero, do we need to work towards a net negative over time? 


David Viner [00:11:45] Yeah. So in terms of overshoot the emissions relationship, we know well, it's baseball. It's not just one goes up, the other is going up. There might be something you know, there's a causal mechanism that's that's the negative 14 impacts, the effects of the greenhouse gases. There's always a linear relationship between increasing concentration and temperature rise. We can see that over the recent decades that the challenge is how how to frame it in a way that we can see success for every point, one of a degree of global warming or even point zero one. With the degree of global warming, we are going to see greater impacts, bigger extreme events, more chronic, extreme, more chronic events, long term droughts coupled to the intensification of of major cyclones and hurricanes, increasing heavy precipitation. So we know these things are in place and are happening. But if we if we give up, we go into irreversible changes, irreversible changes that are. Beyond unpalatable, so, for instance, we might see in terms of what went before the financial circulation or the Atlantic Meridien with overturning circulation. We know that's likely to weaken in the 21st century, whatever pathway emissions pathway wrong. And there's a high confidence in that decline. We're not sure about how quickly that will occur, but we know that if. There's a medium chance that might be an abrupt collapse before 20 when that happens, and that's bad, that's bad for regional weather patterns in the water cycle itself would shift in tropical rain belt, weakening African Asian monsoons and a strengthening of the southern hemisphere monsoons and a drying in Europe. But overall, the challenge is to say that it can keep below one point five degrees. And that is possible is technologically and economically very challenging. That is very beneficial. That means the small island states survive, keep below two degrees, which is a lot more achievable, but that requires rapid action and urgent action. Over the course of this decade. We will we will see the prevention of the the long term that the reversal changes. The Tober general good that will get us down, hopefully, if we do that before 2050, that will hopefully keep us below two degrees. We have to go not negative if we are to avoid the worst impact we have to buy end by the end of this century, start putting in place large scale carbon sinks. So rebuilding the carbon stock in the soil, rebuilding the carbon stock in the terrestrial vegetation and the and the major rainforest and forest systems will be building the carbon stock in the in the ocean systems as well. So we have a lot to do. There's a great deal required. But again, the costs of inaction we know already too far outweigh the cost of the impacts. 


Peter Durante [00:14:48] Great, well, thanks, David. That's actually been a useful primer on the basics surrounding climate science, not necessarily the rosiest of pictures, but an inspiring into to think about what would you recommend for listeners who want to find out more about the science other than reading Facebook or Twitter names, are there places you'd recommend that they go to to look for information? 


David Viner [00:15:08] Yeah, the Intergovernmental Panel on Climate Change, the IPCC, IPCC, which is we'll give the provide the detailed reports and they are very extensive. They run into many thousands of pages referencing many, many, many tens of thousands of scientific papers. But the summary for policymakers in Britain for. Those who are informed, well informed, not well informed about the subject and original language, which is easy to digest and provide the underlying evidence for what the scientific community as. As approved by the world governments state, so the summary for policymakers of all the IPCC report is the first port of call. There's lots of commentary, some completely missing the point. So I'm very wrong on climate change. But again, the one the one authoritative source is the is the IPCC. 


Peter Durante [00:16:04] All right, well, thanks very much, David. Thank you. Great, so David's helped us understand the science, so now we want to maybe move on to solutions to help us understand where we need to apply these solutions. I'm joined by Dario Traum, who's the head of Macquarie's intelligence unit and formerly the head of energy transitions at Bloomberg, the Dario as well. Thank you for joining us today. 


Dario Traum [00:16:28] Thank you, Peter. Great to join. 


Peter Durante [00:16:31] So in order to understand what technologies are most relevant or consequential, this one really need to understand where emissions come from in the first place. So, Dario, can you walk us through at a macroeconomic level where greenhouse gas emissions come from? What are the biggest source sectors? 


Dario Traum [00:16:46] Yeah, absolutely. And so I think from David's introduction, it's been clear that climate change has been tied to human activity and that really is economic activity. And so if we want to trace back where emissions come from, it primarily come from energy consumption, the energy that fuels our economy. So around seventy three percent of global emissions can be tied back to energy use. That energy is spent and the electricity we consume to power buildings and productive processes and increasingly things like cars, but also the molecules like gas and coal we burn to produce heat to essentially across industry, transport, combustion engines, everything that's tied to a combustion and produces an emissions. So we the energy is the main block. And I think that's why it's clear that moving away from fossil fuel has been the main focus of our our climate change mitigation efforts. The rest of the emissions by comes from agriculture and land use that can have a negative and a positive impact on emissions. We've talked about carbon sequestration, which which nature can provide, and then non energy related emissions in industry and waste, respectively, account for around five percent, three percent of global emissions. 


Peter Durante [00:18:14] All right, well, thanks for that. I guess the first instinct for many is to point to energy efficiency is, quote, the answer. The primary solution. And I guess I have sympathy with that because it seems logical. The easiest way to eliminate a ton of emissions is not eliminate it or not admit it in the first place. So there's been lots of great work done in the past by people like Amory Lovins, the Rocky Mountain Institute and many, many others on the potential for improved energy efficiency in parallel with economic growth. That said, there's also limits to what energy efficiency alone can do and things like the Jevons paradox of the rebound effect. We'll put some stuff in the show notes about that and the fact that, as David noted, we don't need to reduce our emissions just by a lot. We have to get to net zero and even net negative over time. I think, you know, encouragingly and disappointingly, covid has shown us just how quickly one can reduce some emissions, but also how even locking down whole economies, you know, flying, minimal commuting and so forth, has only reduced emissions a few percent on a global level, mainly because people still need food, they still need to eat, they still need light heating and cooling, telecommunications and so forth. So I guess what we really need to do is find ways to eliminate the use of coal, gas and oil in these sectors by not just reducing demand, but substituting out fuel and energy use to drive these processes and where we have to capture the emissions that are emitted from using them for these purposes. In addition, we have to look at ways to reduce and reverse emissions being added from deforestation and degradation for these other natural carbon things that David mentioned earlier. So maybe there you can look at these one at a time and this will sort of map out what we're going to go into in subsequent episodes in more depth. So let's break this up a bit. Dario, maybe you can walk us through what are the big tech buckets for the electricity sector? How does one make and store clean electrons at scale? 


Dario Traum [00:19:58] Yeah, so I think that electricity sector in many ways is the one that most of the solutions that can help us scale clean production are already exist and many of them are available. It's getting at low cost. And that's really why electrification is going to be a big focus on that. So solar and wind are obvious ones that have driven the energy transition over the last decade or even two. And then we've just seen very rapid declines that that has meant that even in places where solar and wind resources are great, that's actually attractive to to build out those technologies because of how cheap they are. The other more known ones, mature ones, but a bit more difficult to to develop either because of the local conditions or hydro production where you really need to have that river and for it to be there despite climate change in the future. And it's local environmental impact. Nuclear, which produces plenty of clean electricity at scale, but has other acceptance issues and environmental issues linked to radioactivity, slightly more, I guess, frontier technologies or again, also dependent on on local resources, geothermal. If you have good thermal resources on the ground, you can develop that. But not every country is as fortunate as Indonesia, for example, for those techniques. And then you have a set of technologies that really are useful in terms of providing storage. So there you have batteries and increasingly becoming attractive chemical batteries to store the electricity we generate and especially at relatively rapid capacity into the grid. We have pumped hydro storage. So this actually gives you the opportunity to store the electricity for a longer time. You use periods of high generation in the market to pump water up and them and then when the market needs it, you can really start again. And then you have the one we're increasingly hearing about in recent months, which is hydrogen produced with clean electricity. So you use an electrolyzer to use to clean electricity. You have when you have it, when the sun shines and the wind blows to produce clean hydrogen, which in turn can technically be stored and then used again to to burn the electricity when when you don't have as much excess power in the grid. So those are all the clean technologies. And then there is one last technology bucket in this power generation space, which is carbon capture and storage. And that one implies essentially continuing to produce electricity with the fossil fuels such as gas and coal and capturing the emissions and somehow storing them and ideally even utilizing them. That has certain challenges when in terms of, of course, fundamentally producing electricity with carbon capture and storage is going to be more expensive than than without. So that's one element. And the other is, of course, those who are developing that technology because it's relatively immature and those are quite complex projects. What do you do with the carbon when you started for for a long term? OK, and I think that, 


Peter Durante [00:23:34] yeah, it's a pretty good overview of the world power sector, so as I said, we'll get we'll go through each of those in more depth in subsequent episodes. So we've got lots of ways to make and store clean electrons. Let's think about transportation. I would break this down into terrestrial, maritime and aviation. So within terrestrial transport. Break that down further. We have passenger cars and trucks and obviously motor bikes and two and three wheelers. We've got light duty commercial vehicles, heavy duty and long haul trucks. So the leading contenders out there at the moment would be battery. Electric vehicles is more and more people familiar with and for some sectors hydrogen and on road and off road transportation. Our view is we think biofuel, biofuels will play kind of a limited role in aggregate above what they already do. But we'll talk about those later. And then also land. We have rail. So much of this is already electrified by overhead lines and that can be expanded, but not universally so. Other options in play at the moment would be hydrogen and batteries for those so against topics. We'll talk about the next up in maritime meaning, rivers, coastal ships, ferries and more and more long haul intercontinental freight batteries are actually finding their way into pleasure boats already and into some coastal areas. And the Pacific Northwest, the US or Norway. But we don't think they're likely viable in the absence of a technological breakthrough for longer distances because of energy density and hydrogen can have a role to play for various and some vessels. We're seeing those now, but they have some fundamental technological challenges that limit their use for long haul shipping around their volumetric energy density. And that's where derivatives of hydrogen can be used to make ammonia or methanol that various companies are now starting to look at shipping firms as potential zero carbon fuels going forward. And then lastly, in aviation, we would split that again by short haul and long haul batteries and hydrogen are already starting to be tested for short haul and more than tested, even even implemented for short haul aviation up to a few hundred nautical miles, which actually accounts for a fair amount of of global air traffic. But they face similar kind of fundamental challenges for long haul applications. And that's where drop in replacements like biofuels or so-called synthetic hydrocarbons can maybe be more attractive in the future. So we'll have a whole separate section on transportation that I think people find interesting Daryn. Let's talk a bit about about industry. You already mentioned carbon capture and storage. Can you make us walk us through what are the things that are that are interesting for industries, be it cement or steel or things along that line? 


Dario Traum [00:26:02] I think we're in the street quite often, people include several industries in the category called Hard to Obey. But but really what that means is it's hard to electrified. So I think any industrial process that runs on electricity that you can supply with the clean electricity. But it's that technology that we talked about before was that solar wind storage, a combination of those is technically relatively straightforward to decarbonize. So as you provide them with seat, but a lot of industrial processes require quite high levels of heat and that high heat is typically today generated by coal. A big chunk of it is generated by coal and the other by gas. And that's really where we need to clean this burning molecule. So and they're basically carbon capture and storage is one option. And that's quite relevant. If you have quite a targeted source of emissions and you understand it well and you can essentially manage its capture. But the other is hydrogen. And that's what a lot of people are putting the hopes on, because once hydrogen has definitely different characteristics to gas, there is hope that a clean hydrogen supply chain for four industry to replace gas and coal has a lot of similarities to the existing fossil fuel supply chain for industry, and that essentially the same players could be involved in developing and scaling it in the future. 


Peter Durante [00:27:43] Great, thanks for that. And I guess the last two sectors to think about would be heat in general and agriculture. So for heating and obviously for cooling, energy efficiency is really important, but not really the panacea because we have existing building stocks. I live in London and a hundred and fifty year old building. It will be here at another hundred years, we hope. And much of the existing housing stock are buildings that will be here in 20 or 50 or so on. So we're gonna have to look at options around, say, electrifying heat with clean electrons mentioned above, possibly also using hydrogen in certain markets and certain applications. Agriculture is probably or potentially even more complicated in some ways because we have to look at all the inputs that go into modern agriculture. So those are the emissions from the fertilizers and pesticides and the fungicides and that sort of thing, and from the tractors and the farm equipment as well as the supply chain, but interestingly, also the farming practices themselves. How do we work on sequestering more carbon in soils? How do we change the crops that we grow? How do we change the way that we we raise livestock for food and that sort of thing? Well, Jerry, thanks very much for that. Appreciate your help. And we look forward to talking about some of these things in more depth as we go forward and give you the OK, so that's a lot of ground covered in a pretty short period of time and must see our thanks to both David and Dario for helping us set the scene for the episodes to come. And as per Dario's section, there are a lot of solutions available to us. Pretty excited to look at these and to go through each of those in depth in the episodes to come. So if you're interested in hearing more about those and those episodes, please be sure to subscribe to McCary Think Again podcast. If you've got questions that we haven't touched on or that you'd like us to address in subsequent podcast, please send an email to MAM podcasts at Macquarie dot com. That's MAM podcasts at Macquarie dot com. And be sure to look out for the next episode. So until next time. Thanks again. 


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