As we mentioned in last week’s Soapbox, the direction of travel of greenhouse gas emissions is far from good – even BP agree! Which means that the longer governments delay, the more forceful and urgent the policy response needs to be.

In her last hurrah as PM, Theresa May’s committed the UK to a zero carbon target by 2050. The cost? Huge, obviously! Our energy infrastructure is vast and complex and has take more than 150 years to build. But the cost of doing nothing is even greater and the longer we do nothing the more expensive it gets! And anyway, as the advisory group on the costs and benefits of net zero sets out in its report, it’s pretty much pointless trying to estimate what the cost might be; economists struggle to estimate GDP more than a year or two out.

However, all is not lost. What we do know is the remarkable speed with which renewable energy costs have fallen, rendering those earlier forecasts of the costs of decarbonisation extremely pessimistic. How quickly? Since 2010, solar PV prices have fallen 83%, wind turbines 25%. LED lighting has gone from 5% of the global lighting market to 40% in six years and renewable investment now outpaces fossil fuels. In the UK,

It’s the first time since the Industrial Revolution that more electricity has been produced from zero and low-carbon sources rather than fossil fuels. It’s tremendously exciting because it’s such a tipping point.”  John Pettigrew, CEO of National Grid, recently.

It’s not unreasonable to expect similar cost reductions in other key technologies, such as batteries, fuel cells and electric vehicles:

“Once a technology becomes sufficiently competitive, it starts to change the entire environment in which it operates and interacts. New supply lines are formed, behaviours change, and new business lobbies push for more supportive policies. New institutions are created, and old ones repurposed. As costs fall and expectations of market size increase, additional investment is induced and the political and commercial barriers to a transition begin to drop away. A tipping point is eventually reached where incumbent technologies, products and networks become redundant.”    -Source – Report to the Committee on Climate Change of the Advisory Group on Costs and Benefits of Net Zero

The economics of clean energy are increasingly compelling and the scales are tipping in its favour as the diagram from Carbon Tracker shows below.

And once the economic tipping point is reached, the opportunity for politicians to act is enhanced. The energy incumbents’ ability to obfuscate and lobby is increasingly overwhelmed by financial reality. A political tipping point becomes a possibility. In enacting more sustainable energy policies, politicians are, after all, simply aligning themselves and policy with the economics of a rapidly changing energy landscape.

We would therefore argue that it feels like we are at, or are approaching multiple tipping points. New energy technologies are cheaper than fossil fuels for electricity and will soon be cheaper for transport. For the reasons set out above, anchoring views around concrete climate change policy commitments is not appropriate as the process of decarbonisation will not be linear. Companies that sell unsustainable products will face strategic dilemmas. But the biggest problem we face also creates enormous investment opportunities… and those companies providing solutions that address climate change should benefit from secular tailwinds.

About the author

Ryan Smith is Head of ESG Research. He joined Kames Capital in October 2000 as an SRI analyst and was appointed to his current position in September 2002. He has 18 years’ industry experience*. His role involves managing the team that conducts the ESG screening process for our Responsible Investing funds. Ryan’s team also provides corporate governance screening and research for all equity investments, and conducts research into environmental and social issues. Before joining us, he worked as an environmental chemist for Severn Trent Water. Ryan has an MSc in Environmental Chemistry from Nottingham Trent University and is a CFA charterholder.  *As at 30 April 2019.

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