Andrew Keen is head of content, energy & resources, industrials at investor relations company Edison Group.
Earlier this month, the energy and industry track took center stage at COP28. Despite concerns about the United Arab Emirates being both a major oil and gas producer and the host of a pivotal climate conference, some progress was made on crucial issues while avoiding controversies from overshadowing the importance of finding solutions.
The incongruence of holding a climate conference in a major energy-producing state is important, as it highlights the importance of having the oil industry at the table, fostering holistic conversations with all stakeholders. This led to some of the most impactful climate resolutions we have seen to date.
As we approach the end of 2023, nations grapple with the urgent need to tackle the hottest year on record and the growing imperative to curb global warming below 1.5°C. COP28 emphasized the pivotal role of the energy and industrial sector in fast-tracking the energy transition — a core theme shaping the future of clean energy, and consequently, the fate of our climate.
Landscape of clean energy investment
Much progress has been made in translating national climate goals into particular corporate and government ESG targets. Some entities, such as governments, listed companies, and private enterprises, are increasing investments in sustainable practices like renewable energy. As of June 2023, almost two-thirds of the world’s largest 2,000 companies, by annual revenue, are covered by a net zero target.
This trend is not without its dissenters. The rise of “Anti-ESG” sentiment in 2023, accompanied by skepticism about the ambiguity of ESG measurements, reflects the need for standardization in ESG ratings, a pain point highlighted at global conferences such as COP and one which was unfortunately, not solved at COP28.
Concerns about “greenwashing” ESG initiatives have also led to dissatisfaction among investors. Vanguard and BlackRock, once advocates for ESG, scaling down their ESG commitments sends a concerning signal about the future actions of corporations without clear guidance.
However, amid these challenges, there has been a surge in renewable power growth, with 2023 witnessing the largest absolute increase in global renewable capacity additions. With more than 440 GW of renewable energy added this year — more than the entire installed power capacity of Germany and Spain combined — demand for renewables outweighs obstacles like rising interest rates and supply chain issues. This growth is fueled by a significant increase in global investment in the industry, reaching $358 billion in the first half of 2023 — an all-time high.
Commitments to increase investment were seen at COP28, with the UAE announcing its $30 billion new fund, Alterra, to bring institutional capital into climate investment.
Balancing energy security and phasing down fossil fuels
Despite this growth, the energy sector still faces critical issues. Industry players must find a delicate balance between energy security and the imperative to phase down fossil fuel usage.
This is not a simple dichotomy; it’s a complex equation that requires navigating the shortfall in cash, particularly for developing countries aiming to shift their energy systems from fossil fuels to green sources. According to recent data from COP28, the UN estimates a financing gap of over $500 billion per year for climate projects in emerging markets over the next 10 years. Further, the International Energy Agency has said $4.5 trillion will be needed each year for clean energy alone by the early 2030s, up from $1.8 trillion now.
The central question ahead of COP28 was whether parties would agree to phase out or phase down fossil fuels, building on the historical reference to the phase-down of coal at COP26.
Thankfully, they did. The final agreement, known as the UAE Consensus, has targets to triple renewables and double energy efficiency by 2030. In a monumental moment, this COP marks the first official agreement for a “transition away” from fossil fuels.
As a result, fossil fuels have now been defined as stranded assets, with Germany’s Climate Envoy Jennifer Morgan stating “The signals are clear. If you’re an investor, the future is renewable. Fossil fuels are stranded assets.”
What about unabated fossil fuels and carbon capture?
Beyond phasing down fossil fuels, the debate on unabated fossil fuels — emissions produced from coal, oil and gas that cannot be recovered — was also at the heart of COP28 discussions. While the EU pushed for a phase-out of these unabated fossil fuels in the final agreement, the UAE Consensus fell short — with a weaker commitment to the “phasing out” of unabated fossil fuels.
As a result, limiting and capturing “abated” fossil fuels, those greenhouse gases that can be captured or permanently stored, will be crucial to addressing global emissions. This is particularly true in sectors like cement, where there isn’t a current solution to emissions regardless of the energy source. However, questions arise about the scalability of this technology, given the rise of alternative technologies like hydrogen.
Cost of the energy transition
The primary challenge confronting the clean energy transition, including those mentioned earlier, is the escalating cost of capital, estimated between $110 trillion to $275 trillion. The scarcity impedes progress in the clean energy industry, accentuated by the lack of financial support from developed countries for emerging economies transitioning to green energy, a major barrier highlighted at COP28.
Consequently, informed decisions on technology adoption and investment strategies are needed. The clean energy sector urgently needs innovative funding, encompassing both governmental and private sector investments in research and development. While there’s been some movement at COP28, transparency in ESG initiatives is crucial to gain investor trust and attract further funding, propelling advancements in clean energy technologies for a swifter and more equitable industry evolution.
COP28 presented a critical juncture for the global community to address the challenges and opportunities in the energy and industry track. It emphasized the need for nuanced discussions, collaborative solutions, and a commitment to balancing energy security with the imperative to reduce fossil fuel usage. While decisions at COP28 are a significant step forward, more action is needed to ensure a sustainable and resilient future. The energy sector requires clarity and increased financing to meet ESG goals. Let’s hope the aftermath of the UAE Consensus provides it.