Investing for Net Zero: The top three imperatives
Energy Transition Commission has brought out the nuances around the Race to Zero in terms of priorities and investments. While the numbers look very over-whelming in terms of the yearly investment needed to fuel this journey ($2 Trillion per year), it is on the other hand very under-whelming that actual projects on the ground is mired in procrastinations than any physical evidence of concrete result-oriented timetable.
The starting point is however three decisive areas and let me start with the most important one, which is removal of all subsidies around the fossil fuel. India actually leads this effort and we must complement the government for such a step that the true price of fossil fuel is starting to come out there in the open for the citizens and firms to create their decision matrix around investments. It may look anti-people, but the heart of the matter is that the faster it comes out in the open the better it is for the future.
Removal of Subsidies: It is the starting point and then the next step is to start building the pool of taxes on carbon which will be round-tripped to those who build programs for making improvements in consumption and emission. Consumption reduction and emission reduction should be done separately and with conclusive evidence like the Swiss system of self-declaration followed with measurement and audits. The cost of this must be built into the tax such that the inspection costs are sufficiently incentivised. Unless and until the taxes cover the costs of externalities, the true cost of using fossil fuels will never be visible to people and firms.
India has done well in this direction starting with Petrol and Diesel and Coal through subsidy elimination and CESS. The next step would be to set up the mechanism for returning back the benefits to those who take action versus the others who take none. The actions must be directed to common people and firms separately. If energy efficient devices reduce electricity consumption in households they need to be incentivised, which in some ways exist in the tariff plans, but it needs to be more broad- based. For firms this could be in every area of consumption from sourcing to the end of life of the product in use. Life cycle tracking and cost management rather than just the production and acquisition cost is where the focus must shift.
Massive investments in Zero-Carbon Power Generation and Heat Generation for industrial use: This has started in the right direction but the hard to abate sectors must be the area of attack. The investments for both low carbon fuels to carbon neutral electricity, combined with actions of recycling and input mix change will take us to the more difficult areas of carbon capture. But this timetable of investments must be set.
Take Cement for example and the full cost of abatement could be $100/T, equal to the current price of cement. This when looked at from the consumer point of view in building industry, this could raise the cost of building by 3% according to the report by ETC. How the pass through will work in the entire chain is however a matter of detailed work. No Cement firm can ever create a pass-through model believing that the entire cost can be passed through. The investment to abate these costs is so fundamental. But to reduce $100/T of cost will be need Billions of dollars of investment in this industry.
The case for such huge investments is straight forward, it will impact the cash flow of the existing business. It cannot work, with current structure of managerial incentives. There must be a way to re-route this over a vehicle and the finance community can make useful contributions here.
Focusing on Financing the Net Zero through several levers
The Financial community, together with Government pledges are working on options to finance $2 Trillion investment needed per year to get to Net Zero. If I consider 8% of emissions coming from difficult to abate sector like Cement, in this industry alone we need $160 Billion investment to fully create a path for Net Zero. The current investments are nowhere near this and will never be as all stakeholders including the financial sector and investors first of all must be on the same page.
So where does it leave us, with technologies to be advanced, science based targets to be developed, alternate materials to be sourced, carbon sequestration and capture to be taken to the viable conclusions?
The levers to work on must be based on mitigating the cost increase that could stem from carbon taxes and offsets to start with and make the Science Based targets be followed up with the right kind of smart investment levers.
The least we can do is make all stakeholders aware of the investments needed for making progress and these cannot compete with the business needs of expansion and profit improvement, unless government regulations make them so.
This is where several stakeholders must come together, public private partnerships included.
ABOUT THE AUTHOR:
Procyon Mukherjee is an ex-Chief Procurement Officer at LafargeHolcim India.