The real economy is not a side event in the global decarbonization effort

This article first appeared on World Economic Forum.

  • The real economy needs to be at the centre of climate action, with the harder-to-abate sectors key to avoiding the worst impacts of climate change.
  • That means creating net-zero initiatives at the industry sector-level which bring together the most climate-ambitious companies to draw up net-zero transition strategies.
  • Such sectoral initiatives and industry platforms offer a critical complement to the national approach pursued by the Paris Agreement, but are not a substitute.

One of the adages of the environmental movement used to be “think global, act local”. There’s a lot to be said for encouraging individuals and organizations to take action close to home. But when it comes to addressing the climate impact of carbon-intensive industries, fragmented local action alone just won’t cut it. We must operate across borders to create systemic change across entire industrial sectors.

Heavy industry and long-distance transport, which account for 30% of global greenhouse gas (GHG) emissions are often referred to as “harder-to-abate” sectors because, in contrast to many other economic activities, they cannot simply be electrified and decarbonized by a switch to renewable power.

Yet these sectors hold the key to avoiding the worst impacts of climate change. Show that we can decarbonize these, and we can decarbonize the whole global economy.

Climate action in a global economy

The unavoidable truth is that we live in a global economy. Capital is mobile, as are the giant multinationals who can switch production between continents in response to demand, competition and regulatory changes. Climate change, too, is a global problem that requires a global solution.

But the attempt to create a top-down global system of governance, through the Kyoto Protocol, did not work. Instead, it was superseded by the Paris Agreement, which is built on a bottom-up system where governments propose voluntary national emissions targets. This architecture has fostered a ramp-up in national climate commitments, including a recent multiplication of net-zero country targets.

However, a drawback of the Paris Agreement is that it ties climate obligations to national borders. Yet climate change is borderless, and economies are not hermetically sealed by those borders. When we scratch the surface of the national economy, we find industry sectors that transcend borders and face international competition. They share global supply chains and markets, are financed by international investors, and navigate a patchwork of national regulations.

To decarbonize those sectors, governments face a dilemma: move too aggressively with national decarbonization plans, and risk seeing carbon-intensive firms flee to jurisdictions which are ducking their responsibilities; move too slowly, and risk locking-in whole sectors in high-carbon infrastructure and dangerously destabilizing the climate.

Across sectors, fossil fuel combustion is the biggest source of GHGs, accounting for 80% of emissions. Image: McKinsey & Company

The answer lies in value chain collaboration

The answer, as we see it, lies in creating net-zero initiatives at the industry sector-level that bring together the most climate-ambitious companies from around the world to draw up global net-zero sectoral transition strategies and de-risk low-carbon investment through value chain collaboration.

These initiatives – the net-zero industry platforms that the Mission Possible Partnership is building in seven harder-to-abate sectors – bring together industry leaders, their suppliers, their customers and their financiers from across the world to define pathways to net-zero emissions by mid-century; to identify precisely which actions – technological developments, investments, demand signals, government interventions – are required by when to get us there; and to collectively commit to those actions.

They unite ambitious players within each sector that recognize both the urgent need to address their emissions, the medium-term competitive advantage offered by moving rapidly towards a net-zero economy, and the importance of value chain collaboration to shape up a more favourable environment for low-carbon investment.

These platforms aim to accelerate progress within sectors by sharing (including with governments) the up-front costs of bringing breakthrough technologies to market, and by de-risking the first wave of commercial-scale investments. This entails creating demand for zero-carbon products and services at a premium price, providing carbon-intensive industries with access to lower-cost low-carbon energy, de-risking financing through blended finance models, and creating a level playing field through regulation.

Moving to clean energy is key to combating climate change, yet in the past five years, the energy transition has stagnated.

Energy consumption and production contribute to two-thirds of global emissions, and 81% of the global energy system is still based on fossil fuels, the same percentage as 30 years ago. Plus, improvements in the energy intensity of the global economy (the amount of energy used per unit of economic activity) are slowing. In 2018 energy intensity improved by 1.2%, the slowest rate since 2010.

Effective policies, private-sector action and public-private cooperation are needed to create a more inclusive, sustainable, affordable and secure global energy system.

Benchmarking progress is essential to a successful transition. The World Economic Forum’s Energy Transition Index, which ranks 115 economies on how well they balance energy security and access with environmental sustainability and affordability, shows that the biggest challenge facing energy transition is the lack of readiness among the world’s largest emitters, including US, China, India and Russia. The 10 countries that score the highest in terms of readiness account for only 2.6% of global annual emissions.

To future-proof the global energy system, the Forum’s Shaping the Future of Energy and Materials Platform is working on initiatives including, Systemic Efficiency, Innovation and Clean Energy and the Global Battery Alliance to encourage and enable innovative energy investments, technologies and solutions.

Additionally, the Mission Possible Platform (MPP) is working to assemble public and private partners to further the industry transition to set heavy industry and mobility sectors on the pathway towards net-zero emissions. MPP is an initiative created by the World Economic Forum and the Energy Transitions Commission.

For example, the Clean Skies for Tomorrow Coalition is working to address the chicken-and-egg issue whereby airlines cannot absorb the current price premium of sustainable aviation fuels (SAF) in the absence of a level playing field (especially in a context of low margins accentuated by the COVID-19 crisis), whereas the cost of producing SAF will only come down if production scales.

The coalition is working across the value chain to simultaneously create voluntary mechanisms for driving demand for SAF through cost-sharing with corporate air travel customers, encourage governments to put in place regional blending mandates to grow demand further, while pursuing an agreement at the level of the International Civil Aviation Organization (ICAO) to ensure a global level playing field and a just transition, and make investment into SAF plants more attractive through a mix of public support and innovative financing mechanisms.

Bringing together airlines, airports, fuel providers and manufacturers, the coalition is uniquely positioned to develop tools – like the SAF standard or a SAF policy toolkit – that can be adopted by the whole industry, and to orchestrate a dialogue with financial institutions and governments on the actions they can and should take. Aviation

As other sectors proceed to decarbonize, the aviation sector could account for a much higher share of global greenhouse gas emissions by mid-century than its 2%-3% share today.

Sustainable aviation fuels (SAF) can reduce the life-cycle carbon footprint of aviation fuel by up to 80%, but they currently make up less than 0.1% of total aviation fuel consumption. Enabling a shift from fossil fuels to SAFs will require a significant increase in production, which is a costly investment.

The Forum’s Clean Skies for Tomorrow (CST) Coalition is a global initiative driving the transition to sustainable aviation fuels as part of the aviation industry’s ambitious efforts to achieve carbon-neutral flying.

The coalition brings together government leaders, climate experts and CEOs from aviation, energy, finance and other sectors who agree on the urgent need to help the aviation industry reach net-zero carbon emissions by 2050.

The coalition aims to advance the commercial scale of viable production of sustainable low-carbon aviation fuels (bio and synthetic) for broad adoption in the industry by 2030. Initiatives include a mechanism for aggregating demand for carbon-neutral flying, a co-investment vehicle and geographically specific value-chain industry blueprints.

When industry drives ambition

Such sectoral initiatives offer a critical complement to the national approach pursued by the Paris Agreement. Indeed, ambitious industry and finance commitments can unlock ambitious national and multilateral commitments. United, the most ambitious industry leaders can provide a clear and loud message to policymakers on the specific needs in terms of regulations, public finance and international cooperation to enable net-zero industries, and stand ready to exchange with individual governments and coalitions of governments to discuss how those policy frameworks can best be implemented.

These companies will also, in parallel, demonstrate what is possible – and realistic – in terms of pump priming the value chain transformations required to initiate and accelerate emissions reductions in their sectors, by developing collaborative pilot, demonstration and eventually commercial-scale projects. Governments will be able to point to real-world evidence of economically viable green supply chains. This will undermine the ability of those less ambitious players in their sector to argue for less ambitious targets, and will create a race to the top as the technological and market advantage of first movers becomes clear.

Climate change poses an urgent threat demanding decisive action. Communities around the world are already experiencing increased climate impacts, from droughts to floods to rising seas. The World Economic Forum’s Global Risks Report continues to rank these environmental threats at the top of the list.

To limit global temperature rise to well below 2°C and as close as possible to 1.5°C above pre-industrial levels, it is essential that businesses, policy-makers, and civil society advance comprehensive near- and long-term climate actions in line with the goals of the Paris Agreement on climate change.Global warming can be beaten thanks to this simple plan

The World Economic Forum’s Climate Initiative supports the scaling and acceleration of global climate action through public and private-sector collaboration. The Initiative works across several workstreams to develop and implement inclusive and ambitious solutions.

This includes the Alliance of CEO Climate Leaders, a global network of business leaders from various industries developing cost-effective solutions to transitioning to a low-carbon, climate-resilient economy. CEOs use their position and influence with policy-makers and corporate partners to accelerate the transition and realize the economic benefits of delivering a safer climate.

To be clear, industry platforms and sector decarbonization pathways are not a substitute for the national-level approach of the Paris Agreement. It is a necessary complement to that approach, which can help unlock higher climate ambition at the national level – captured in nationally determined commitments (NDCs) and mid-century strategies under the Paris Agreement – and initiate intergovernmental agreements when relevant to address carbon leakage risks – at the International Maritime Organization for shipping and ICAO for aviation, and in settings yet to be invented in sectors like steel or chemicals which are not currently governed by an international organization.

Meeting the goals of the Paris Agreement will be extremely difficult – perhaps impossible – without recognizing the globalized nature of the modern economy and without using systems-level thinking to work through innovative and science-based public-private partnerships at a sectoral level to enable industrial decarbonization at the pace and scale needed to limit global warming to 1.5 degrees Celsius. The real economy needs to be at the centre of climate action.

Written by:

Faustine Delasalle, Co-Executive Director, Mission Possible Partnership and Director, Energy Transitions Commission

Anthony Hobley, Co-Executive Director, Mission Possible Partnership and an Executive Fellow, WEF, World Economic Forum