A few trillion between friends IRINA SLAV
That $18 trillion spread across the seven years until 2030 came in at some $2.6 trillion in additional annual investments. But that was just BCG’s estimates.
A few trillion between friends
JUN 24
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PAID
In November last year, Boston Consulting Group issued a warning. The firm said that there’s an $18-trillion funding gap in energy transition plans until 2030. There was $19 trillion in funding already committed to transition activities, BCG said. But it needed another $18 trillion and the gap needed filling if transition goals were to be achieved.
“Challenges include inflation, supply chain constraints and pressures, and higher costs of capital,” BCG said in its warning, essentially saying that the transition has got more expensive than previous believed, shocking the world.
That $18 trillion spread across the seven years until 2030 came in at some $2.6 trillion in additional annual investments. But that was just BCG’s estimates. Others foresee a much higher price tag, such as the tellingly named Climate Policy Initiative, which last year estimated the annual investments needed for a successful transition at $9 trillion globally by 2030, rising from $1.3 trillion between 2021 and 2022. The FT had the decency to say that “the bill will be immense”.
Investment is already on the rise, from that $1.3 trillion to $1.8 trillion last year. Of course, that’s nowhere near the target of BCG’s $2.6 trillion and the rate of increase suggests we’d never get to the 2030 target of the Climate Policy Initiative but it is an increase so it’s being celebrated… while companies ditch their emission-cutting plans, meaning transition investment plans.
Until about this year, emission reduction commitments were all the rage, everywhere in the corporate world. Climate targets were the new black, but this new black wore off shockingly fast. Now, companies are discovering their targets are either unrealistic or, at best, unpalatable financially. So they’re busy revising them or cancelling them altogether.
Hilariously, because the transition as we know is great comedy these days, government efforts to enforce even more commitments have backfired in yet another spectacular explosion by making companies become secretive about the whole transition business. Because emission-tracking methods are so inaccurate no one can really be sure they’re measuring their footprint accurately and, consequently, they cannot prove progress on those reduction commitments.
Proof has become extremely important as regulators zero in on greenwashing, which is a very bad thing as opposed to real emission reduction. It’s just really hard to distinguish between the two, so companies are beginning to feel it’s not worth it if all you can look forward to is a fine because you failed to prove beyond any doubt you are indeed cutting emissions.
Canada’s recent law on greenwashing is perhaps one of the best illustrations. The oil industry called it a gag law since it essentially bans companies from making any claims about transition efforts without verifiable proof. Only legislators forgot to detail how exactly these claims will be verified. All they could come up with was “adequate and proper substantiation in accordance with internationally recognized methodology.”
That certainly sounds very responsible and very official. What it’s lacking is petty details along the lines of “how exactly”. The energy industry has responded by removing content from their websites. More industries will likely follow because while oil and gas may be the biggest target of the law they are not the only one. Everyone is a target.
The substantiation trend is not exclusive to Canada, of course. Regulators and legislators on both sides of the Atlantic are eager to get businesses in line by mandating verifiable and quantifiable disclosures that are doing a great job of making companies reconsider those climate commitments — especially as they realise living up to those commitments is in many cases impossible because they’re often a tiny little bit over-ambitious.
It was in this context of legislative and regulatory pressure that the news dropped that the transition would need an additional $11 trillion worth of insurance cover between now and 2030. The reason for that not inconsiderable amount in additional costs is the lack of historical data about transition technologies and therefore insight into risk levels.
The “wake-up call” as the authors called it, comes from Boston Consulting Group again, this time in partnership with Howden. Basically, the two discovered that underwriting transition projects is tricky because there is less clarity about the level of risk inherent in these projects since the technologies used are so new, at the current scale. Of course, that’s the official line.
The unofficial line may have more to do with the recent destruction of the myth of cheap wind and solar, brought to all of us by central bankers. It may also have to do with the profitability myth of these and other transition technologies that is currently being destroyed by physical reality and the fundamental laws of the free market, which amazingly work even when the market is very far from free — see Europe and its negative electricity prices during peak solar output hours.
In any case, the transition needs an additional $11 trillion over the next seven years in the form of insurance cover or it might not make it. If anyone wants to do the adding-up, be my guests. It’s just $11 trillion. What’s another $11 trillion between friends, right? Especially as these friends are trying to save the planet, even if it will cost a minimum of $215 trillion by 2050. Yep, that’s the minimum necessary to avoid the most apocalyptic of apocalyptic climate doom scenarios.
It appears the insurance industry could do more to meet those additional coverage needs of transition industries. Unfathomably, however, it’s not going to. Because it would rather continue providing cover for the oil and gas industry. I know, it’s devastatingly shocking but it’s true. It must have something to do with longitudinal data and risk levels. Or it might have something to do with the fact that oil rigs don’t usually get destroyed by hail, who knows.
If insurers can’t be sure about risk, they’ll likely ask for higher premiums because this is how the business works. Amazingly, yet again, this apparently won’t affect the final cost of transition technologies, at least according to our all-time favourites at the IEA.
Believe it or not, the IEA just came out with a new report that says — are you ready? — that the transition would make energy more affordable. Interest rates are irrelevant. Insurance costs are irrelevant. Customer demand is irrelevant. Pretty much everything that matters in the real world is irrelevant to the IEA when it wants to make a point about “a virtuous circle of innovation, accelerated deployment, economies of scale and policy support,” that has driven the cost of wind and solar down.
With the ounce of self-respect left at the agency, the authors do point out they’re talking about “generation costs”, even as they conveniently omit the fact that coal and gas generation costs feature punitive and progressively rising carbon taxes, from which solar and wind are spared. Obviously, that, too, is irrelevant. Meanwhile, companies continue to reassess their climate target situation and the reassessment does not provide much hope that those trillions are about to become readily available.
Unilever’s new CEO summed it up earlier this year. “When the initial targets were set we may have underestimated the scale and complexity of what it takes to make that happen,” Hein Schumacher said and that’s as good an epitaph of the most financially — and environmentally — disastrous economic experiment in human history as