5 minute read 28 Jun 2021
Smoke coming from industrial chimney

How future-back thinking in three pillars can help us achieve net-zero

Authors
Douglas Bell

EY Global Trade Policy Leader

Helping internal and external clients to understand the changing cross-border ecosystem. Furniture maker, outdoor enthusiast, family guy.

Kyle Lawless

Associate Director, Global Public Policy, Ernst & Young LLP

Helping EY navigate the complexity of operating across the globe. Innovator. Intrapreneur. Believer in the power of business, governments and societies to solve global challenges. CrossFitter.

5 minute read 28 Jun 2021

To achieve net-zero emissions by 2050, governments and business must work together and think future-back.

In brief
  • Governments need to look past the next election cycle, avoid the pendulum swings of recent years and embrace long-term climate policies.
  • Financial metrics should be adopted that reflect the extent to which climate change poses a major threat to the stability of global markets.
  • Massive public-private partnerships will be needed to drive investments in clean energy and climate-related research.

To prevent a climate catastrophe and protect the planet for future generations, government, business and civil society must work together to achieve net-zero emissions by 2050. Decarbonizing the world’s $100 trillion economy will be one of the biggest economic transformations in history.

Getting there will require a coordinated effort that includes three key pillars: politics, finance and technology. This will also require future-back thinking — a strategy that starts with 2050 and works backward to understand the actions we need to take today.

The shared global experience of the COVID-19 pandemic has illustrated both the interconnectedness of our world and our vulnerability to the environment. This experience also provides us with an opportunity to build a better working world — one in which we focus on delivering results for future generations, not just the next quarter or the next election cycle.

Here are a few ways we can challenge short-termism and drive innovation in politics, finance and technology:

Politics: governing for a generation

Increasing political polarization and gridlock have emerged as recurring themes in global politics in recent years. The United States, for example, has witnessed a series of pendulum swings in nearly every election cycle that have resulted in major policy shifts on a wide range of issues, such as corporate taxation, immigration and health care. Climate policies have not been immune.

Too often, policymaking is geared toward winning the next election or the 24-hour news cycle, rather than long-term planning for current and future generations. While we are already experiencing the effects of climate change, its effects will be most acute in the decades ahead if we do not change our behavior today. EY analysis shows that nearly 60% of Gen Z — the cohort of 1.8 billion people between 10 and 24 years old — lives in countries with a high vulnerability to climate change, but with low readiness for responding to it. This underscores the threat climate change will have on this generation.1

One significant development in this regard, is the European Union’s development of a taxonomy for sustainable activities (EU taxonomy). The EU taxonomy is a classification system that establishes a list of environmentally sustainable economic activities (e.g., natural gas, nuclear energy, hydroelectric power), providing definitions to companies, investors and policymakers. The taxonomy  is intended to help the EU meet its climate and energy targets for 2030 (including at least 40% cuts in greenhouse gas emissions from 1990 levels) and the objectives of the European Green Deal.

While debate on proposed definitions (e.g., the possibility for “shades of green”) continues, the EU taxonomy — at its heart — measures economic activities against where they should be if the EU is to meet its pledge to reduce carbon emissions to net zero by 2050, rather than making incremental improvements based on where they currently are. Adopting a future-back approach to this challenge will help all parties keep their sights on achieving meaningful progress.

Finance: reflecting the green premium

In recent remarks at the U.S. Department of the Treasury’s Financial Stability Oversight Council, Secretary Janet Yellen called climate change “an existential threat to our environment,” as well as one that “poses a tremendous risk to our country’s financial stability.”2

Despite the wide acknowledgment of climate change as a source of risk for financial stability, the pricing of climate-related risk is nascent and climate disclosure still lacks comparability and standardization. The failure to account for the externalities caused by human activities that generate greenhouse gas emissions causes assets to be mispriced, capital to be misallocated, and leaves investors and other stakeholders without access to relevant information for decision-making.

There are two key changes that can help us understand the causes and cost of economic activities on climate change. One is by calculating what Bill Gates calls green premiums. Green premiums refer to the additional cost of choosing a clean technology over one that emits a greater amount of greenhouse gases.

To illustrate the concept of the green premium, consider today’s cost of cement ($125 per ton) vs. cement after carbon capture, which adds anywhere from 75% to 140% more to that cost, creating a green premium of $94 to $175 per ton.3

The cost of  anormal ton of cement vs new price

Second, are climate-related financial disclosures that provide stakeholders with comparable and reliable information on material climate risks. In their June communique, G7 leaders called for a move toward mandatory climate disclosures based on the Task Force on Climate-related Financial Disclosures (TCFD) framework. The leaders wrote, “[TCFD and other] initiatives will help mobilise the trillions of dollars of private sector finance needed, and reinforce government policy to meet our net zero commitments.” This endorsement adds to growing support for a global baseline for sustainability reporting standards as illustrated in EY Global Public Policy’s recent report, The future of sustainability reporting standards (pdf).

While imprecise, these mechanisms can provide clarity of the more complete environmental cost of human activities and, together with policy tools, such as the EU taxonomy, increase transparency in the financial markets and mobilize the investments required to stimulate clean technology and market innovation.

Technology: scaling investment and R&D

Just as we need to  govern for the long term and reorient financial markets to consider the realities of unchecked greenhouse gas emissions, we also need to encourage major investments in clean energy and climate-related research.

Global greenhouse gas emissons from human activities

Governments and businesses will need to fund and launch major efforts to develop carbon capture technology, zero-carbon cement and steel, geothermal energy, electro fuels, nuclear fusion and other technologies that will help reduce emissions. On a positive note, many companies are finding that going green can also be good business —reducing costs and finding new revenue opportunities by pursuing initiatives that cut emissions and open new markets.

While impressive, however, these initiatives often only lead to incremental improvements that will not sustain the radical, long-term transformation needed to achieve net-zero emissions. A Citi GPS report states that even though the pace of innovation and investment has accelerated, “the gap between what’s being spent and what needs to be spent is huge, as much as $3-5 trillion per year.”4

To that end, governments and businesses must act in concert to encourage public-private partnerships that provide long-term financing and reduce the risk of moon-shot investments. These investments could also require “radical collaboration” — the willingness to work with anyone who can help, even competitors.

The looming threat of a global climate catastrophe is real. For the survival of the planet, businesses and, governments, need to find innovative ways to pool knowledge and resources to achieve major breakthroughs in technology – and public policy – that advance green energy and reduce carbon emissions.

Summary

The threat of climate catastrophe demands that businesses and governments work together to achieve net-zero emissions by 2050. The only way to approach this challenge is to adopt future-back thinking, a strategy that works backward from 2050 to plot the steps needed today to save the planet for future generations. Achieving this goal will require major shifts in politics, finance and technology, but it is within reach if we start now.

About this article

Authors
Douglas Bell

EY Global Trade Policy Leader

Helping internal and external clients to understand the changing cross-border ecosystem. Furniture maker, outdoor enthusiast, family guy.

Kyle Lawless

Associate Director, Global Public Policy, Ernst & Young LLP

Helping EY navigate the complexity of operating across the globe. Innovator. Intrapreneur. Believer in the power of business, governments and societies to solve global challenges. CrossFitter.