Net zero transition takes time devours resources and costs money and in today’s changing world the cost to business, industry and households is increasing. Nick Gibson reveals the real costs of sustainability.
Net zero transition costs were highlighted in a recent McKinsey report that estimated the annual global cost of getting to net zero will be £6.8 trillion and that at least 25% of all global tax revenues must be spent on climate change action in order to achieve net zero objectives by 2050. The International Energy Agency believes it will cost $9.2 trillion per year. The world is currently spending $5.7 trillion a year
While the cost of addressing climate change will be high for business, industry and households financial expenditure will be balanced by the enormous commercial opportunities surrounding net zero transition.
“Net zero will make the IT and internet revolutions appear tiny by comparison,” says Peter Bance ceo of Origami, a company that specialises in technology to monetise energy assets. “There’s a global consensus among capital markets that climate change is not only the biggest threat to humanity, but that net zero transition is also the biggest commercial opportunity in history.”
According to a recent World Economic Forum report sustainability technologies that address UN Sustainable Development Goals is a market valued at $12 trillion. The urgent need for change will fuel innovation and the many rewards that follow, observes Nell Agate Tsui, Quant ESG Analyst at Satellite Vu: “Investment in climate technology is a key factor in continuing to reduce emissions with technologies that are being utilised now but also with emerging technologies – as John Kerry said, 50 per cent of carbon reduction needed to get to Net Zero will come from technologies that have not yet been invented.”
Net zero transition cost to industry
Whatever the potential commercial opportunities there are existing major costs to absorb. “The cost of change falls into two worlds,” says Richard Clifford at Keysource. “Carbon offsetting is one but given industry’s high energy use there is not a lot of direct renewables involved as we must rely on local availability of renewables in a regional grid mix. Then, for data centres, there’s the cost of investing in new infrastructure, improving legacy facilities, a ten year cycle of replacing equipment with more efficient hardware and technologies. The cost of change is offset by the reduction in carbon and energy use driven by sustainability requirements and technological developments. The total cost of ownership is reducing all the time and it is attracting increasing investment.”
The steel industry must accelerate net zero transition projects and increase supply of near-zero primary steel to remain within a Paris-aligned carbon budget. According to new MPP Sector Transition Strategies commercialisation of net-zero technologies would cost up to $200 billion per year.
Peter Hjorth ceo, ceo of mining company Bluelake Mineral has already worked out the cost of net zero transition to his own company: “In terms of cost for achieving our carbon-reduction targets we are assuming the following parameters: Increased CAPEX: + 20-25%; Lower OPEX: -20-25%; Reduced CO2 footprint: – 25-50% depending on areas and scale of investment.”
Aluminium producers will need to spend up to $1 trillion to reduce carbon emissions by 95 per cent to meet 2050 targets according to MPP’s STS strategy for primary aluminium.
Cost is the biggest factor among those seeking to integrate sustainability into the built environment says Anthony Coates-Smith, MD of heat networks specialist Insite Energy. “Sustainability requirements and the need to reduce energy use are increasing but ambitions face major challenges in terms of energy security and energy affordability. The sooner industry can make sustainable energy cheaper the sooner we can satisfy both net zero and high cost elements.”
The International Energy Agency forecasts spending on physical assets on the path to net-zero set to reach $275 trillion by 2050.
“As part of their net zero journey data centres face major costs of investing in new infrastructure to improve legacy facilities,” says Peter Bance. “Industry and regulation moves quickly and over a ten year cycle industry will need to replace a lot of plant and equipment with more efficient hardware and technologies.”
Household net zero costs
Research by Love Energy found that 44 per cent of UK households are worried they’ll have to foot the bill for net zero transition with 32 per cent stating they couldn’t afford to install alternative heating. Low-carbon heat pumps can cost around £10,000 to install, and while the grant scheme would see that price cut in half, a heat pump would not deliver savings on running costs due to households paying £159 in green levies on their electricity bills.
According to ECIU research homes with better insulation, heat pumps and electric vehicles are experiencing 30 per cent lower energy price inflation than homes with average insulation, gas boilers and petrol cars. A decision in 2013 to cut UK government support for household insulation means 10 million homes have missed out and taxpayers burdened to tune of up to £9 billion a year.
Money spent on an efficient heating system during construction will deliver major returns when the building is occupied says Coates-Smith. ““We have spent a lot of time and money on consumer and client education to demonstrate the benefits of a sustainable approach and how to reduce energy use. Our efforts have resulted in a 28 per cent year-on-year reduction in heat energy consumption and associated cost for our clients and customers.”
Environmental impact: cost of net zero transition
According to a CDP research report climate change is expected to cause $1 trillion in losses to business over the next five years with unabated climate change expected to cause major job losses in agriculture and construction due to extreme weather events.
The cost to the environment can be seen every day in news reports of flooding, drought, famine and wildfires. Average costs to the Fire and Rescue Service of vehicle response to all vegetation fires in the UK is around £77m a year, according to a Fire and Rescue Statistics report. It can cost up to £1m to suppress a large peat moorland fire with ecological restoration of recent peatland fires in UK’s Peak District National Park costing over £12m. The scale of environmental cost is highlighted in a recent report by Morgan Stanley that showed between 2016 and 2018 climate-related disasters cost the world $650 billion.
“Five years ago there was a cost associated with going green that required subsidies in order to make renewables viable because generating energy with fossil fuels was cheaper and easier,” says Peter Bance. “That’s no longer the case and market economics have now fundamentally shifted and the cheapest way make energy is through renewables.”
Net zero transition: the commercial opportunity
While the cost of addressing climate change is high for business, industry and households, the commercial opportunity is even greater. UNEP has estimated that overall spending for climate adaptation projects are expected to be $180 billion annually in the years to 2030 and even higher between 2030 and 2050. According to a recent World Economic Forum report sustainability technologies that address UN Sustainable Development Goals is a market valued at $12 trillion.
“Today it is possible to create very real value from investment in green energy, market forces are such that renewables now offer a very positive financial return, says Bance. “Wind, solar and other renewables will create real value over the lifetime of investment. From investment funds and factory owners to households and consumers alike the value of renewable energy is being realised every day. Over time renewables will get cheaper and more widely available but the cost of transition must be lowered and must happen faster.”
“Capital markets have now woken up to the fact that net zero is a massive commercial opportunity. There is a now huge wall of money looking for a home in sustainability and renewable energy solutions. Markets are exited by the prospect of deploying trillions of dollars, pounds and yen into the net zero space because they know there will be very attractive returns. The majority of the money will be used in construction and deployment of physical assets such as wind and solar farms, batteries, storage solutions and electric batteries but there will also be huge investment in enabling technologies that leverage these physical investments, things like data and software solutions, management and analytics, and new de-risking and financial models. In coming years green assets, technologies and service models will absorb trillions of dollars of capital and, in a virtuous circle, ongoing visible success of net zero transition activities will attract even more investment.”
The cost of doing nothing
Recent estimates suggest a potential global economic loss of $7 trillion associated with the continued pursuit of economic growth powered by carbon-based fuels.
Action is urgently needed but despite growing impetus global net zero ambitions could stall due to the lack of capital for transition in the third world, says Peter Hjorth at Bluelake Mineral. “In places like African Sub-Sahara there is simply not enough capital available to enable the necessary investments to achieve net zero objectives by 2050. The Western world including the World Bank and other organizations may want to help facilitate the green transition but at the end of the day the undeveloped world will not be prioritised. During the Covid-19 pandemic, for example, 95 per cent of financial resources for vaccination were used up in the developed countries and virtually nothing left for the poor countries.”