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May 8, 2020

The Paths to Net Zero
foreignaffairs.com/articles/2020-04-13/paths-net-zero

For 30 years, diplomats and policymakers have called for decisive action on climate change—

and for 30 years, the climate crisis has grown worse. There are a multitude of reasons for this

failure. The benefits of climate action lie mostly in the future, they are diffuse and hard to pin

down, and they will accrue above all to poor populations that do not have much of a voice in

politics, whether in those countries that emit most of the world’s warming pollution or at the

global level. The costs of climate action, on the other hand, are evident here and now, and

they fall on well-organized interest groups with real political power. In a multipolar world

without a responsible hegemon, any collective effort is difficult to organize. And the profound

uncertainty about what lies ahead makes it hard to move decisively.

These political hurdles are formidable. The good news is that technological progress can

make it much easier to clear them by driving down the costs of action. In the decades to

come, innovation could make severe cuts in emissions, also known as “deep

decarbonization,” achievable at reasonable costs. That will mean reshaping about ten sectors

A wind farm near the Nufenen Pass, Switzerland, September 2016

Denis Balibouse / Reuters

https://www.foreignaffairs.com/articles/2020-04-13/paths-net-zero

http://www.energy-transitions.org/content/accelerating-low-carbon-transition

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in the global economy—including electric power, transportation, and parts of agriculture—by

reinforcing positive change where it is already happening and investing heavily wherever it

isn’t.

In a few sectors, especially electric power, a major transformation is already underway, and

low-emission technologies are quickly becoming more widespread, at least in China, India,

and most Western countries. The right policy interventions in wind, solar, and nuclear

power, among other technologies, could soon make countries’ power grids far less

dependent on conventional fossil fuels and radically reduce emissions in the process.

Technological progress in clean electricity has already set off a virtuous circle, with each new

innovation creating more political will to do even more. Replicating this symbiosis of

technology and politics in other sectors is essential. In most other high-emission industries,

however, deep decarbonization has been much slower to arrive. In sectors such

as transportation, steel, cement, and plastics, companies will continue to resist profound

change unless they are convinced that decarbonization represents not only costs and risks for

investors but also an opportunity to increase value and revenue. Only a handful have grasped

the need for action and begun to test zero-emission technologies at the appropriate scale.

Unless governments and businesses come together now to change that—not simply with

bold-sounding international agreements and marginal tweaks such as mild carbon taxes but

also with a comprehensive industrial policy—there will be little hope of reaching net-zero

emissions before it’s too late.

THE FUTURE IS ELECTRIC

From today’s vantage point, no single domain offers greater opportunities for deep

decarbonization than electric power. The use of electricity does not increase or reduce

emissions in itself; electricity delivers energy that may or may not be clean depending on how

it was generated. An electric car, for instance, doesn’t do much good against global warming

if all the electricity comes from conventional coal plants. Still, electrifying the economy—in

other words, designing more processes to run on electricity rather than the direct combustion

of fuels—is essential. This is because, compared with trying to reduce emissions in millions of

places where they might occur, it is far easier and more efficient to reduce emissions at a

modest number of power plants before distributing the clean electricity by wire. Today,

Western economies convert about 30 percent of their energy into electric power. If they want

to get serious about decarbonization, that fraction will need to double or more.

No single domain offers greater opportunities for decarbonization than electric power.

Getting there will require progress on two fronts. The first is the electrification of tasks that

use vast amounts of energy but still rely on fossil fuels, such as transportation and heating.

Overall, transportation accounts for 27 percent of global energy use, and nearly all of it relies

on oil. The car industry has had some success in changing this: the latest electric vehicles

rival high-end conventional cars in performance and cost, and electric cars now make up

http://www.energy-transitions.org/mission-possible

http://deepdecarbonization.org/wp-content/uploads/2015/09/US_DDPP_Report_Final.pdf

https://www.evolved.energy/post/2019/05/08/350-ppm-pathways-for-the-united-states

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around eight percent of new sales in California (although only 1.3 percent nationwide) and

nearly 56 percent in Norway, where the government offers massive subsidies to buyers.

With improved batteries, heavier-duty vehicles, including buses and trucks, could soon

follow. In fact, China already fields a fleet of over 420,000 electric buses. By contrast,

aviation—which makes up only two percent of global emissions but is growing rapidly and

creates condensation trails in the sky that double its warming effect—presents a tougher

challenge. A modern battery can store only two percent of the energy contained in a

comparable weight of jet fuel, meaning that any electric airplane would need to carry an

extremely heavy load in batteries to travel any reasonable distance. Even in the best-case

scenario, commercial electric aviation at significant scale is likely decades away, at least for

long-haul flights. Long-distance shipping also faces challenges so daunting that

electrification is unlikely to be the best route. And in each of these areas, electrification is all

the more difficult because it requires not only changing the conveyances but also building

new charging infrastructures.

Besides transportation, the most important electrification frontier is heating—not just in

buildings but as part of industrial production, too. All told, heating consumes about half the

raw energy that people and firms around the world use. Of that fraction, some 50 percent

goes into industrial processes that require very high temperatures, such as the production of

cement and steel and the refining of oil (including for plastics). These sectors will continue to

rely on on-site fossil fuel combustion for the foreseeable future, since electricity cannot

match the temperature and flexibility of direct fuel combustion. Yet in other areas, such as

lower-temperature industrial processes and space heating for buildings, electrification is

more practical. Heat pumps are a case in point: whereas conventional heaters work by

heating up indoor air, heat pumps act like reversible air conditioners, moving heat (or, if

necessary, cold) indoors or outdoors—a far more efficient approach.

Electrification, of course, will not on its own reduce emissions by much unless the power grid

that generates and distributes the electricity gets cleaner, too. Ironically, some countries have

made modest progress on this front even as they have doubled down on fossil fuels. China,

for instance, has swapped out aging coal plants with newer, more efficient ones, cutting

emission rates in the process. (The country’s most efficient coal plants now emit less

carbon dioxide per unit of electricity than comparable U.S. plants.) The United States, for its

part, has cut down on its emissions thanks to innovations in horizontal drilling and fracking

that have made it economically viable to extract shale gas. In 2005, when this technology first

became commercially relevant, coal accounted for half of all the electricity produced in the

United States; today, coal’s share is down to one-quarter, with much cleaner and inexpensive

natural gas and renewables making up the difference.

EV Market Share by State

https://www.bloomberg.com/news/articles/2019-05-15/in-shift-to-electric-bus-it-s-china-ahead-of-u-s-421-000-to-300

https://www.iea.org/reports/renewables-2019/heat

https://www.eia.gov/todayinenergy/detail.php?id=42755

https://www.eia.gov/environment/emissions/carbon/

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A blast furnace at a steel factory in Duisburg, Germany, January 2020

Wolfgang Rattay / Reuters

In theory, fossil fuels could still become much cleaner, even nearly emission free. This could

be possible with the help of so-called carbon capture and storage (CCS) technologies, which

capture the carbon dioxide emissions created by industrial processes and pump it safely

underground. In practice, investors have remained wary of this approach, but in both the

United States and some European countries, recently introduced subsidies are expected to

unleash a wave of new CCS projects in the years ahead. One CCS scheme, currently being

tested by a group of engineering and energy firms, completely rethinks the design of power

plants, efficiently generating electricity from natural gas while capturing nearly all the carbon

dioxide produced in the process at little extra cost. In regions where natural gas is cheap and

abundant, this technology could be a game changer.

For now, improved fossil fuel technology has amounted to shallow decarbonization: it has

reduced emissions enough to slow the rate of climate change—in the United States, emissions

from the power sector have dropped by 29 percent since 2005 thanks mainly to the shale gas

revolution and growth of renewables—but not enough to stop it. To prevent the world from

warming further will require much more focus on technologies that have essentially zero

emissions, such as wind, solar, hydroelectric, and nuclear power, in addition to CCS, if it

proves commercially scalable. According to the United Nations’ Intergovernmental Panel on

Climate Change, these low-carbon technologies would need to generate 80 percent of the

world’s electricity by 2050 (up from about one-third today) in order to limit warming to two

degrees Celsius above preindustrial levels.

Home

Five Takeaways from the 2017 Energy Forums

Preliminary US Emissions Estimates for 2019

https://www.iea.org/fuels-and-technologies/renewables

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Renewables, in particular, will play a central role. Thanks to decreases in the cost of wind and

solar power equipment—and thanks to a mature hydroelectric power industry—renewable

energy already accounts for over one-quarter of global electricity production. (Nuclear

provides another ten percent.) In the United States, the cost of electricity from large solar

farms has tumbled by 90 percent since 2009, and wind energy prices have fallen by nearly 70

percent—and both continue to drop.

Given those plunging costs, the main challenge is no longer to make renewables cheap; it is

to integrate them into the power grid without disruptions. To avoid blackouts, a power grid

must align supply and demand at all times. Energy output from wind and solar plants,

however, varies with the weather, the season, and the daily rise of the sun. The more a power

grid relies on renewables, then, the more often the supply will not match the demand. In the

extreme, extra power must be dumped—meaning that valuable capital and land were used

inefficiently. To be less vulnerable to such shocks, utility companies will need to expand the

size of their power grids, so that each can draw on a larger and more diverse array of energy

sources. In order to deal with excess supply from renewables—a condition that will become

much more frequent as the share of renewables rises—they must also create incentives for

users to vary their demand for power more actively and find ways to store surplus electricity

on a much larger scale. Today, nearly all bulk storage capacity takes the form of hydroelectric

pumps, which store electricity by moving water uphill and recovering about 80 percent of the

power when it flows back down. In the years ahead, soaring demand for electric vehicles will

drive down the cost of lithium-ion batteries; those batteries could become an affordable way

to store energy at the grid level, too. And as the need for storage increases, even cheaper

methods may come on the market.

The main challenge is no longer to make renewables cheap; it is to integrate them into the
power grid without disruptions.

To better integrate renewables, policymakers can also rely on the strategic use of another

zero-emission technology: nuclear energy. Although most efficient when running flat out

24 hours a day, nuclear power plants can also operate flexibly to cover the supply gaps from

wind and solar power. Some of France’s nuclear reactors, for instance, already cycle from

about one-quarter to full power and back again, sometimes twice a day, to compensate for

fluctuations in the supply and demand of renewables.

Independent of renewables, nuclear power already contributes massively to cleaner grids.

Every year, some 440 operational nuclear reactors account for lower global carbon dioxide

emissions of an estimated 1.2 billion metric tons. In the United States, research suggests that

keeping most existing nuclear plants open would be far less expensive than many other policy

options. In fact, most countries would do well to expand their nuclear power even further to

cut back on their emissions. In the West, however, major expansions are not on the

horizon: public opposition is strong, and the cost of building new reactors is high, in

part because countries have built too few reactors to benefit from the savings that come with

repetition and standardization. Yet in other parts of the world—especially China and South

https://www.lazard.com/media/451086/lazards-levelized-cost-of-energy-version-130-vf.pdf

https://www.vox.com/2015/6/19/8808545/wind-solar-grid-integration

https://www.sdcwa.org/sites/default/files/White%20Paper%20-%20Pumped%20Energy%20Storage%20V.16.pdf

Breakthrough Batteries

https://world-nuclear.org/information-library/facts-and-figures/world-nuclear-power-reactors-and-uranium-requireme.aspx

Mapped: The US nuclear power plants ‘at risk’ of shutting down

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Korea, which have more active nuclear power programs—the costs are much lower and public

opposition is less pronounced. Moreover, whereas countries once designed and built their

own reactors, today many simply import them. That model can create new risks—the sector’s

leading exporter today is Russia, a country not renowned for its diligence regarding reactor

safety or the security of nuclear materials—but it also has the potential to make commercial

nuclear technology available to many countries that could not develop and deploy it safely on

their own. Abu Dhabi’s purchase of four gigantic South Korean–built reactors, the first of

which is set to start operating next year, shows the promise of this model. The same approach

could work for other countries that currently satisfy their large energy needs with fossil fuels,

such as Saudi Arabia.

When it comes to the precise technological makeup of a future decarbonized economy, expert

opinions diverge. Engineers and economists, for the most part, imagine solutions that bundle

several approaches, with both CCS and nuclear power acting as important complements to

renewables. Political scientists, on the other hand, tend to see a bigger role for renewables—

one of the few areas in energy policy that usually garners support from across the ideological

spectrum, including in the United States. Yet even this rather popular solution can prove

divisive. Fierce debates rage over where to locate generators such as wind turbines, including

among putative environmentalists who support the technology only if they don’t have to look

at it. Public opposition to new wind turbines in Norway—even in already industrialized areas

—and to offshore wind parks in the eastern United States are harbingers of tough siting fights

to come. The same issue arises when it comes to power lines: making the most of

renewables requires longer, more numerous power lines that can move renewable

power wherever it will be needed, but public opposition can make such grid expansions a

bureaucratic nightmare. In California, for example, the most recent big power line designed

to move renewable power where it will be useful—in that case, from the sunny desert to San

Diego—took a decade to build, even though the technical engineering and construction

portion of the project should have consumed no more than two years. China, by contrast, has

blown past the efforts of the United States and Europe, with dozens of ultrahigh-

voltage lines, most of them built in the last decade, crisscrossing the country.

THE GREAT UNKNOWNS

Political obstacles notwithstanding, expanding the electrification of transportation and heat

and the production of low-carbon electricity offers the surest path to a clean economy to date.

The latest analysis by the Intergovernmental Panel on Climate Change, for instance, suggests

that more pervasive use of clean electricity in the global economy would cover more than half

the cuts needed for deep decarbonization. Yet just how big a role electrification will

ultimately play is hard to predict—in part because its impact will depend on the future

trajectory of rival solutions that are only just beginning to emerge and whose potential is

impossible to assess precisely.

https://www.enec.gov.ae/barakah-plant/

https://www.ipcc.ch/site/assets/uploads/2018/02/ipcc_wg3_ar5_chapter6.pdf

https://www.technologyreview.com/2018/11/08/138280/chinas-giant-transmission-grid-could-be-the-key-to-cutting-climate-emissions/

https://www.ipcc.ch/site/assets/uploads/2018/02/SYR_AR5_FINAL_full.pdf

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Hydrogen, in particular, could serve much the same function as electricity does now in

carrying energy from producers to users—and it offers crucial advantages. It is easier to store,

making it ideal for power systems dependent on ever-fluctuatingsupplies of

renewable energy. And it can be burned—without producing any new emissions—to generate

the high levels of heat needed in heavy industry, meaning that it could replace on-site fossil

fuel combustion in sectors that are hard to electrify. Hydrogen (either in its pure form or

mixed with other chemicals) could also serve as liquid fuel to power cars, trucks, ships, and

airplanes. A zero-emission economy could integrate the two carriers—electricity

and hydrogen—using each depending on its suitability for different sectors.

The technology needed to turn hydrogen into an energy carrier already exists in principle.

One option is to break up (or electrolyze) water into its constituent elements, hydrogen and

oxygen. The hydrogen could then be stored or transported through the natural gas pipeline

networks that already string across all advanced economies. Once it reached its user, it would

be burned for heat or used as an input for a variety of chemical processes. So far, this

approach is too expensive to be viable on a large scale, but growing investment, especially in

Europe, is poised to drive down the cost rapidly. Initial tests, including planned networks of

hydrogen pipelines outside Stockholm (for making steel), Port Arthur in Texas (for industrial

chemistry), the British city of Leeds (for residential heat), and the Teesside area (for several

applications, including power generation) and numerous other ventures, will soon yield more

insights into how a real-world hydrogen economy would fare.

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Pipelines at an oil and gas refinery in Hungary, October 2013

Laszlo Balogh / Reuters

CCS is somewhat of a wildcard, too. Some industrial processes produce prodigious and highly

concentrated streams of carbon dioxide emissions that should be relatively easy to isolate

and capture. The production of cement, which accounts for a whopping four percent of global

carbon dioxide emissions, is a good example. But firms operating in global commodity

markets, where missteps can be economically disastrous, are hesitant to invest in fledgling

systems such as CCS. To change that, state-supported real-world testing is overdue. A

nascent Norwegian project to collect carbon dioxide from various industrial sources in

several northern European countries and inject it underground may provide some answers.

Another promising area for reducing emissions is agriculture, a field in which advances on

the horizon could yield large cuts. More precise control over the diets of animals raised for

food—which will probably require more industrial farming and less free grazing—could

lead cows, sheep, and other livestock to emit less methane, a warming gas that, pound for

pound, is 34 to 86 times as bad as carbon dioxide. (It would also help if people ate less

meat.) Meanwhile, a host of changes in crop cultivation—such as altering when rice fields are

flooded to strategically determining which engineered crops should be used—could

also lower emissions.

https://thehill.com/opinion/energy-environment/476783-us-leads-new-wave-of-carbon-capture-and-storage-deployment

http://www.climatechange2013.org/images/report/WG1AR5_Chapter08_FINAL.pdf

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Agriculture’s biggest potential contribution, however, lies belowground. Plants that engage in

photosynthesis use carbon dioxide from the air to grow. The mass cultivation of crops that

are specially bred to grow larger roots—a concept being tested on a small scale right now—

along with farming methods that avoid tilling the soil, could store huge amounts of carbon

dioxide as underground biomass for several decades or longer.

As the hard reality of climate change has set in, some have begun to dream of technologies

that could reverse past emissions, such as “direct air capture” machines, which would pull

carbon dioxide from the atmosphere and store it underground. Pilot projects suggest that

these options are very costly—in part because it is thermodynamically difficult to take a dilute

gas from the atmosphere and compress it into the high concentrations needed for

underground storage. But cost reductions are likely, and the more dire the climate crisis

becomes, the more such emergency options must be taken seriously.

GETTING TO ZERO

The ramifications of climate change are proving more disastrous than originally thought, just

as politicians are realizing that cutting emissions is harder than anticipated. That leaves a

large and growing gap between climate goals, such as the Paris agreement’s target of

limiting warming to 1.5–2.0 degrees Celsius above preindustrial levels, and the facts on the

ground. The world has already warmed by about 1.1 degrees, and at least another half a

degree is probably inevitable, given the downstream effects of today’s emissions, the inertia

of the climate system, and the inherent difficulty of reshaping industrial infrastructure.

The defining industrial project of this century will be to leave carbon behind.

To close the gap between aspirations and reality, governments need to grasp that they cannot

rely solely on hard-to-enforce international agreements and seductive market-based

approaches, such as carbon pricing, that will work only at the margins. The world needs new

technology, and that means more R & D—much more—and a lot of practical experience in

testing and deploying new technologies and business strategies at scale. To stimulate that

progress, governments need to embrace what is often called “industrial policy.” In each

major emitting sector, authorities should create public-private partnerships to invest in, test,

and deploy possible solutions.

The details will vary by sector, but the common thread is that governments must directly

support fledgling technologies. That means tax credits, direct grants, and promises to

procure pioneering green products even if they are more expensive than their conventional

alternatives. These steps will ensure that new low-emission products in sectors such as

cement, steel, electricity, plastics, and zero-carbon liquid fuels can find lucrative markets.

The need for such government intervention is hard to overstate. Producing steel without

emissions, for example, could initially be twice as expensive as producing it in the traditional

Harnessing Plants Initiative

https://www.nationalacademies.org/our-work/developing-a-research-agenda-for-carbon-dioxide-removal-and-reliable-sequestration

https://www.nature.com/articles/d41586-018-07586-5

http://www.energy-transitions.org/content/accelerating-low-carbon-transition

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way—a penalty that no company operating in a global, competitive commodity market will

accept unless it has direct support in developing the necessary technology, reliable markets

through government procurement, and trade protections against dirtier competitors.

For now, no major government is taking these steps at a reasonable scale. The much-touted

Green New Deal in the United States is still weak on specifics, and the more concrete it

becomes, the harder it may be to form a supportive political coalition around it. Its

counterpart, the European Green Deal, is further along yet also faces political challenges and

administrative hurdles. If these schemes focus on making critical industries carbon free and

provide lots of room for experimentation and learning, they could prove effectual. If they

become “Christmas-tree proposals,” with ornaments for every industrial and social cause

imaginable, then they may collapse under the weight of their cost and poor focus.

U.S. Representative Alexandria Ocasio-Cortez (D-NY) and Senator Ed Markey (D-MA) at a news

conference for their proposed Green New Deal in Washington, February 2019

Jonathan Ernst / Reuters

A bigger supply of new fundamental ideas for decarbonization is essential. On the first day of

the 2015 Paris climate conference, a group of 24 governments, along with the eu and the

billionaire philanthropist Bill Gates, pledged to double their spending on clean energy R &

D. So far, the group’s self-reported data show that it is at 55 percent of its goal; independent

and more credible assessments suggest that the actual increase is only half of that.

Mission Innovation, as the collective is known, has also set up working groups on solutions

Home

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such as CCS and hydrogen, but those groups have little capacity to develop and implement a

collective research agenda. What is needed instead are smaller, more focused groups of high-

powered backers. Powerful governments have a part to play, but not an exclusive one,

considering that some (such as the United States today) are unreliable and therefore less

important than subnational actors, such as California, or even wealthy philanthropists.

Initiatives such as Mission Innovation are essential because markets for clean technology are

global. Three decades ago, when diplomatic efforts to combat climate change began,

most innovation in heavy industry, including in the energy sector, came from a small number

of Western countries. No longer. When it comes to electric buses and scooters, China is king,

with India taking some baby steps. For electric cars, U.S., Japanese, and European

manufacturers are in the lead technologically, but Chinese firms have larger volumes of sales.

Innovation in ultrahigh-voltage power lines is coming particularly from engineering firms

based in Europe and Asia. The explosion in China of low-cost production of solar

photovoltaics was initially geared to supply the highly subsidized German market.

Given this geographic breadth, nationalist trade policies that limit cross-border exchange and

investment could easily gum up the works. In particular, the United States should reform its

approach to foreign investment in sensitive technologies. Instead of the current review policy

—an opaque process managed by the Committee on Foreign Investment in the United States

—regulators should follow the “small yard, high fence” rule proposed by former U.S. Defense

Secretary Robert Gates: identify a short list of technologies that are truly sensitive and

protect the United States’ advantage in those areas while opening the doors to the power of

globalization for all others.

THE LONG HAUL

The great technological transformation of the nineteenth century was to harness the power of

fossil fuels for industrial growth. The twentieth century rode the wave of innovation that

followed and, inadvertently, put the planet on track for massive warming. The defining

industrial project of this century will be to leave carbon behind. As governments and firms

embark on this enterprise, they should prepare for the long haul. It took cars some 30 years,

starting in 1900, to completely replace horses on American …

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May 18, 2020

How the Private Sector Can Combat Climate Change
foreignaffairs.com/articles/world/2020-04-13/unlikely-environmentalists

There’s a reason climate change is often described as a “wicked problem.” Fully

decarbonizing the economy will require not only completely transforming the global energy

infrastructure, at a cost of many trillions of dollars, but also retrofitting all of the world’s

buildings, remaking the planet’s agricultural practices, and revolutionizing transportation

systems. It is difficult to see how this can be accomplished without some kind of global

carbon tax or regulatory regime. But putting such a system in place is proving to be

enormously difficult. The 2015 Paris agreement on climate change was a good first step, but

many countries show little sign of meeting the commitments they made as part of that

agreement, and the United States’ withdrawal from the process has presented a significant

barrier to further progress. Given the slowing global economy and the slide toward populism

and nationalism in much of the world, the prospects for any kind of comprehensive global

accord seem increasingly remote. So far, at least, the public sector is failing to confront the

problem.

BlackRock CEO Larry Fink, center, with French President Emmanuel Macron, right, in Paris, July 2019

Michel Euler / AP

https://www.foreignaffairs.com/articles/world/2020-04-13/unlikely-environmentalists

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But the private sector has begun to step in to fill the vacuum. In January, Larry Fink, the

CEO of BlackRock, the largest asset manager in the world, declared that “climate risk is

investment risk” and announced that going forward BlackRock would ask every firm in its

portfolio to disclose its carbon emissions. BlackRock has roughly $7 trillion under

management and is one of the largest shareholders in nearly every publicly traded firm in the

world. So companies around the world paid attention when Fink went on to say that

BlackRock would consider voting against boards whose firms “do not make sufficient

progress” in addressing climate-related risks and would cease to invest altogether in some

fossil fuel projects.

Fink is not alone. Many of the world’s largest asset owners are coming to the conclusion that

climate change is the most important risk to the long-term health of their portfolios. More

than a third of global invested capital—about $19 trillion—is controlled by the world’s 100

largest asset owners. Nearly two-thirds of this money is in pension funds; the remaining

third is in sovereign wealth funds. These funds are now so large that they are sometimes

referred to as “universal owners” or “universal investors” since, in effect, they hold the entire

market. For that reason, they cannot diversify away from the risk of climate change—a risk

that Mark Carney, who until earlier this year was the governor of the Bank of England,

suggested could result in an abrupt financial collapse, potentially wiping out as much as $20

trillion of assets. To avert that kind of calamity, major asset owners are starting to push the

companies in their portfolios to address climate change.

For the world’s largest asset owners, climate change is not an externality—it is a profound
threat.

This trend is not driven by altruism or a deep commitment to the environment: it’s a function

of economic interests. For the world’s largest asset owners, climate change is not an

externality—it is a profound threat to their long-term returns. It will, after all, be significantly

harder to make money in a world where most of the major ports are underwater, harvests are

failing on a routine basis, and hundreds of millions of people are on the move.

As more and more major asset owners come to this realization, it is creating increasingly

strong incentives for them to cooperate with one another in support of large-scale

decarbonization. Together, they are pressing the firms in their portfolios to set concrete

targets for emission reductions and to make progress toward meeting those targets,

potentially solving the problem posed by firms’ unwillingness to cut their emissions unless

they can be assured that their competitors will follow suit. Someone, however, will need to

monitor that progress and sanction firms that lag behind—a role that would be best filled by

government regulators. The need for such public-sector involvement will likely increase

private-sector support for the policy changes required to drastically reduce carbon emissions.

In this way, private-sector pressure may serve as the force that finally breaks the political

logjam that has long blocked the public action needed to solve the climate crisis.

MONEY TALKS

https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter

https://www.newyorker.com/news/daily-comment/citing-climate-change-blackrock-will-start-moving-away-from-fossil-fuels

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One of the most promising examples of what this might look like in practice is Climate Action

100+, a nonprofit affiliation of more than 300 investors who collectively control nearly half

of the world’s invested capital. The group was founded in 2017 with the goal of persuading

the world’s 100 largest private-sector carbon emitters to “cut the financial risk associated

with catastrophe” by putting in place board-level processes to assess their climate-related

risks and oversee plans for dealing with them, pledging to clearly disclose those risks, and

taking action to reduce greenhouse gas emissions across their value chains rapidly enough to

help meet the Paris agreement’s goal of limiting the increase in the global average

temperature to well below two degrees Celsius.

In December 2018, a group of investors belonging to Climate Action 100+ published a letter

in the Financial Times listing some specific steps they were demanding of companies in

which they invest, including “the rapid elimination of coal use by utilities in EU and OECD

[Organization for Economic Cooperation and Development] countries by no later than

2030.” Six months later, investors from the consortium pushed the oil giant Shell to

announce short-term targets for limiting its greenhouse gas emissions and persuaded BP to

support a shareholder resolution that binds the oil company to disclose the carbon intensity

of its products, the methodology it uses to consider the climate impact of new investments,

and its plans for setting and measuring emission targets. More than half of the 40 oil and gas

companies with which the group has engaged have set long-term quantitative targets for

reducing their emissions. And the group has helped persuade the shipping giant Maersk and

two of the world’s largest mining companies, ArcelorMittal and Thyssenkrupp, to commit to

becoming carbon neutral by 2050.

These kinds of commitments are sometimes dismissed as mere greenwashing: public

relations stunts designed to buy time. And sometimes they are. But they might also help

catalyze an economic transformation that could play a major role in arresting climate

change.

Of course, large asset holders are not the only players who shape a company’s incentives:

employees and consumers do, as well, and they are increasingly insisting that firms go green

—and rewarding them when they do. For example, after the consumer goods giant Unilever

announced that it planned to cut its carbon footprint in half and double its revenue at the

same time—and then followed through by transforming its operations, brand by brand—the

firm joined Facebook, Google, and Microsoft on LinkedIn’s list of the ten most desirable

employers in the world. Sales of Unilever’s “sustainable living” brands—which include Ben &

Jerry’s, Dove, and Vaseline and which Unilever claims “contribute to achieving the

company’s ambition of halving its environmental footprint”—are growing 69 percent faster

than the rest of the business and providing 75 percent of the company’s growth.

Shifting public attitudes about climate change and public policies intended to combat it have

also created clear business opportunities. Solar and wind energy are both multibillion-dollar

businesses. The market for plant-based alternatives to meat is exploding. And global

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recycling could generate close to $400 billion in the next five years.

RISKY BUSINESS

But embracing the innovation that is required to exploit new opportunities is often risky and

expensive. The venture capital industry lost at least $10 billion between 2005 and 2011

investing in clean energy technology. An electric utility that commits to phasing out coal

plants might reap the benefits of declining solar and wind energy costs, but it could also

misjudge the market and significantly increase its costs. An automobile company that invests

in developing electric vehicles might leap ahead of its competitors, but it could also risk

losing out to more cautious rivals.

Universal investors can help mitigate those risks by funneling capital to firms that are willing

to make the first move. This can be transformational in itself, since companies that decide to

embrace new opportunities can often persuade an entire industry to follow them. Walmart’s

massive investments in energy saving and waste reduction, for example, have helped

persuade many other companies to take similar steps. Since 2010, the price of battery storage

has fallen by at least 73 percent, a change driven largely by the electric vehicle company

Tesla’s significant investments in the technology, which spurred the company’s competitors

to invest more than $90 billion in the development of electric vehicles.

Major asset holders can also push companies to commit to aggressive targets for

decarbonizing their business models and insist that they report on their progress. In this way,

universal investors may be able to force every firm in an industry to act, solving the collective

action problem inherent in tackling climate change. Firms don’t naturally act collectively—for

all kinds of reasons, including antitrust law. But when there exists a clear business case for

doing so and cooperation can be credibly enforced, voluntary cooperation can be an effective

means of creating or preserving public goods. Nearly half of the world’s inshore fisheries are

managed through some form of cooperative agreement. Most of the rules governing

international trade are designed and enforced by the International Chamber of Commerce, a

voluntary association founded in 1919.

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Tesla Model X electric cars recharge their batteries in Berlin, Germany, November 2019

Fabrizio Bensch / Reuters

Some of the world’s largest firms are increasingly exploring whether these kinds of voluntary

agreements might be an effective way to reduce emissions. For example, after Unilever came

under pressure from activists to stop using palm oil, the cultivation of which contributes to

deforestation, Paul Polman, who was then the company’s CEO, was able to persuade many of

his fellow consumer goods CEOs that continuing to purchase conventionally produced palm

oil presented a significant threat to their own brands. Partly as a result, more than 60 percent

of the world’s traded palm oil is now covered by sustainability commitments. Similar

agreements with respect to soy and beef have greatly slowed rates of deforestation in the

Amazon River basin. And companies in industries as diverse as airlines, food, retail, apparel,

travel, hospitality, construction, health care, and high technology have begun to coordinate to

reduce carbon emissions across supply chains, so that no single firm is placed at a

disadvantage by going green.

Such arrangements produce a wealth of knowledge about what effective decarbonization

might look like on the ground. As one might expect, however, they are often unstable and

difficult to enforce, since no mechanism exists through which to punish firms that drag their

feet or refuse to conform. Here, universal investors might be able to make a significant

difference by acting as enforcers. If BlackRock, for example, follows through on its threat to

vote against the boards of companies that do not adequately disclose their climate emissions,

every major firm in every industry will be forced to report—in an auditable, replicable way—

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the degree to which it is meeting its commitments. And if the world’s major investors then

vote against the boards of those companies that are falling behind, investors could catalyze

the transformation of entire industries.

THE EARTH LOBBY

Arresting climate change will still require government action, of course, and the changes

afoot in finance and the corporate world could ease the path. As firms commit to reducing

their carbon emissions, they are increasingly recognizing that the most effective way to

ensure that they are not undercut by lagging companies is to press for regulation. Together,

they are creating a constituency for effective climate policy.

In 2017, for example, when U.S. President Donald Trump declared that he was going to

withdraw the United States from the Paris agreement, the CEOs of more than 50 U.S.

companies, including Apple, Gap, Google, HP, and Levi Strauss, published an open letter

urging him to rethink the decision. When Trump stuck to his plan, Elon Musk, the CEO of

Tesla, and Bob Iger, then the CEO of Disney, resigned from some of the president’s advisory

councils in protest. More than 2,000 companies have joined a collaborative effort called “We

Are Still In,” a group working to ensure that the United States meets its commitments under

the agreement despite the administration’s withdrawal. The group includes not only

businesses but also states, cities, religious organizations, and universities. Together, they

represent 68 percent of U.S. GDP, 65 percent of the U.S. population, and the source of more

than half of all U.S. carbon emissions. Such action independent of the federal government

could make a big difference. According to America’s Pledge, a nongovernmental organization

that tracks local progress toward emission reductions, the “full achievement of already on-

the-books policies from state and local actors—paired with rapidly shifting economics in the

power sector—would reduce emissions 19 percent below 2005 levels by 2025 and 25 percent

below 2005 levels by 2030.” This would be a significant step toward the approximately 50

percent reduction in emissions that the UN’s Intergovernmental Panel on Climate Change

estimates is necessary to avoid the most dangerous potential outcomes of climate change.

These efforts and others like them also have the potential to change the nature of the political

conversation around climate change. In an increasingly partisan world, firms occupy a

unique position. According to the 2019 Edelman Trust Barometer, an annual survey

measuring credibility and trust, business is now the world’s most trusted institution, and 71

percent of employees around the world agree that “it is critically important” for the CEOs of

their companies “to respond to challenging times.” A broad-based movement among the

world’s biggest companies to tackle climate change could help legitimate the idea that climate

change is a real danger, that acting to avert it could be a major driver of innovation and

economic growth, and that appropriate public policy could be enormously helpful.

Such a movement could also put increasing pressure on companies that resist decarbonizing.

One of the reasons that climate regulation has stalled in the United States is that a small

minority of firms have invested billions of dollars in actively lobbying against it. If their peers

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start to push for regulation and highlight the dangers inherent in continuing with business as

usual, those laggards will be compelled to change their behavior. One day soon, flooding the

political process with money to defend the burning of fossil fuels could be seen as an

unacceptable reputational risk—or even as morally indefensible.

For many years, experts have assumed that the fastest and most efficient route to global

decarbonization is coordinated state action. But as the world’s political institutions have

come under pressure, such action has become increasingly elusive. Against this background,

the growing understanding that climate change presents a profound threat to the long-term

returns of the world’s largest asset owners provides some reason for hope. As investors push

for change and the realization dawns in more and more boardrooms that the benefits of

climate action will outweigh the costs, it is possible that leading-edge firms could trigger a

cascade of reinforcing reforms, transforming the economics of individual industries and

creating a significant constituency for political action. For decades, when it came to

addressing climate change, large asset holders and big companies acted more as obstacles

than as catalysts. Those days may soon be over.

REBECCA HENDERSON is John and Natty McArthur University Professor at Harvard

University and the author of Reimagining Capitalism in a World on Fire.

MORE BY REBECCA HENDERSON

https://www.foreignaffairs.com/authors/rebecca-henderson

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