Nordea On Your Mind: Energy transition

GHG emissions raise temperatures, which drives climate change and is already causing major damage

The burning of fossil fuels has risen dramatically since the 1800s from human industrialisation. The greenhouse gases (GHG) released trap heat in the atmosphere, raising temperatures, which causes more frequent and more severe extreme weather events. This represents an existential risk for humankind, should our planet ultimately become uninhabitable, and is already causing massive economic damage. One recent study estimates global costs from climate change-induced extreme weather events in 2000-2019 at USD 2.86tn, or 0.05%-0.8% of global GDP per annum. This is likely to get far worse going forward - unless climate change is halted or reversed.

Emissions come from burning fossil fuels – the solution is renewable energy transition

Industrialisation has over the past 200 years brought immense economic growth and rising living standards, but it requires energy. We still rely overwhelmingly on fossil fuels, whose share of total global energy generation has shrunk slightly to 81% in 2023, from 86% in 2010. Greenhouse gas emissions have soared, with Asia now being the key driver and accounting for half of the total. China alone stood for 31% in 2022, about the same as the US and Europe together, and India represented 8%. The only way to reduce emissions enough to reach Paris Agreement goals is to replace fossil fuels with renewable energy sources, although initiatives to increase energy efficiency can also make a major contribution.

Source: Zerotracker.net

Net-zero commitments, what has been promised and what is being delivered?

Under the 2015 Paris Agreement, the 196 signatory countries submit national plans (NDCs) every five years which outline how targets will be reached. The end game is to reach net-zero greenhouse gas emissions. Globally, only 13% of net-zero commitments are in the form of law. 26% of countries have no net-zero targets, and the great majority are declarations or proposals. All commitments are overwhelmingly tail-end loaded, for 2040 and beyond. By region, Europe and North America have the strongest commitments, with one-third law and one-third policy, with the rest of the world far less firm.

Huge investments required, but scope is not unprecedented – range of funding sources needed

Energy demand grows with the economy, and electricity demand will grow additionally from replacement of fossil fuels. Global annual investment in power generation capacity was USD ~2tn in 2015-23, roughly 2.2% of GDP. 43% was renewable energy and infrastructure. The net-zero scenario required to reach Paris Agreement emission targets would require USD ~3tn annually in 2024-50, of which 81% needs to be in renewable generation capacity and infrastructure. Investments would need to be high for the coming decade, but on average 2.3% of GDP for the whole period through 2050. This would take the renewable share from today's 40% to 80% by 2050. Solar and wind power would then be 60% of the total. This magnitude of investment would require a combination of private, public and supranational funding from both lenders and capital markets.

External perspective: interviews with UN, Ovako and European Energy

For the global, high-level perspective on climate change and the energy transition needed to stop it, we spoke to Daniele Violetti, Senior Director at the UNFCCC. Erik Bohman, CFO of niche steel maker Ovako (part of Nippon Steel Group), shared valuable insights from an energy-intensive business in an industry with a challenging emissions profile. And to capture the angle of a provider of renewable energy solutions, we spoke to Knud Erik Andersen, co-founder of European Energy, about the key roles to be played by wind and solar energy going forward.