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Transition to the Low Carbon Economy

Transition to the Low Carbon Economy

Today’s global economy is driven by carbon-based fossil fuels – Coal, oil and gas are used to produce most electricity and petrochemicals. The world is in transition to a low-carbon economy, which is being driven by two major factors:

1. Climate change

There is a need to reduce the impact of climate change, which is being exacerbated by greenhouse gas (GHG) emissions from fossil fuel use.

The tide of sentiment has already turned against coal, the most emissions-intensive fossil fuel. However, more needs to be achieved, as the world has already warmed by an average of 1°C since pre-industrial times and is estimated to warm a further 3°C by 2100.

    2. Technical innovation

    Technical innovations in science and energy have led to solar electricity having less than half the all-in cost of coal generation, therefore causing coal usage to decline.

    The advent of electric vehicles will be at the expense of the oil industry. Electric vehicles use 25% of the energy of a petrol/diesel-driven vehicle and their batteries store surplus solar energy during the day for use at night in domestic or commercial installations.

    Smart meters and appliances smooth out the peaks and troughs of demand – batteries store excess energy and higher tariffs are imposed during peak demand periods. This is destroying the traditional electrical supply industry, where supply continuously follows demand.

    A FOURTH INDUSTRIAL REVOLUTION (4IR) IS UNDERWAY

    This is following on from:

    • The first (1765), which used water and steam to mechanise production;
    • The second (1870), which used electric energy to create mass production; and
    • The third (1969), which used electronics and information technology to automate production.

    The 4IR is being driven by:

    • Digitisation of everything that can be digitised;
    • Exponential improvement in computer processing power;
    • Extreme connectivity; and
    • Combinations of innovation – for example, Waze adds social data (information provided by users) and sensor data (every car monitors traffic speed) to the digital platform of Google Maps, which uses smartphones, digital maps and GPS.

    The 4IR is going to be the most disruptive entity we will see. It is fusing the physical, digital and biological worlds and is impacting all disciplines, economies, and industries. It is reshaping the nature of work by automating work, robotising jobs and releasing skilled people from tedious work, allowing them to focus on using their skills.

    THE LOW-CARBON FUTURE ECONOMY – BUT WHEN?

    Global policy development on emissions reduction is progressing slowly. There is, however, increasing awareness of the problems of climate change, which has led to carbon pricing – putting a price on GHG emissions. More importantly, technology development is driving the transition.

    Despite uncertainties (climate change impact, pace of technical development and global policy development), the low-carbon future might arrive as early as 2040, or as late as the end of the century – but arrive, it will.

    WHAT ARE THE RISKS IN GETTING THROUGH THE TRANSITION?

    Physical impacts are inevitable in terms of heat waves, floods and droughts – Adapting to new conditions is imperative.

    Reputational risk – are companies perceived to be doing enough to facilitate the transition, directly in their own operations or, in the case of a bank, indirectly through loans to emission-intensive operations? This extends to liability risk and climate-related cases.

    Market risk – will demand for current products or services exist in a low-carbon economy?

    Further transition risks arise for companies by moving too quickly, or too slowly, relative to their markets.

    SOUTH AFRICA AND THE TRANSITION

    South Africa is in a difficult position with regards to climate change. It has a GHG emission-intensive economy, largely because of its dependence on coal.

    Its emissions reduction pledge is inadequate. If all countries had the same low level of ambition as South Africa, the average global temperature would be 4°C warmer in 2100 (compared to the projected 3°C).

    Despite the South African government planning to introduce carbon taxation in 2019 and carbon budgeting in 2022, South Africa is vulnerable to climate change effects – the South African interior is projected to rise over 6°C.

    WHAT CAN A COMPANY DO TO MANAGE THE TRANSITION?

    • Be aware of what is happening with climate change and technological innovation – the political, regulatory and technical responses as well as amplifying factors such as public perception and fossil fuel divestment campaigns. This is an existential business sustainability risk.
    • Report GHG emissions and reduction plans annually to the Carbon Disclosure Project (CDP) to manage current and future emissions.
    • The Task Force on Climate-Related Financial Disclosures (TCFD) recommends companies should generate plausible scenarios covering all possible outcomes.

    Opportunities are always much more difficult to identify than risks, but if a company does not find new opportunities, it risks its business being disrupted by others.