‘If all we do is meet net-zero goals by 2050 we have failed’

CFA's Orsagh says we must deal with CO2 and GHG already in our atmosphere and change must be set by policymakers

In the US, Congress has passed, and president Joe Biden has signed, the Inflation Reduction Act (IRA), which is a solid start to reducing emissions and will hopefully send a signal to other developed markets of the level of investment needed.

Emissions need to fall everywhere. A 2019 report by Morgan Stanley estimated that about $50trn will be needed globally by 2050 to adequately address global warming. This breaks down to $14trn for renewables investment, $11trn for electric vehicles, $2.5trn for carbon capture and storage, $20trn for hydrogen (which is a dubious fuel of the future if you ask some), and $2.7trn for biofuels. It is doubtful that the Morgan Stanley report got everything perfectly right, but other estimates present similar numbers.

In some respects that $50trn number is not that high. When you consider that global GDP in 2021 was about $94trn, and consider we have 27 years left until 2050, we are talking about a global investment of about $1.85trn per year, or about 2% of global GDP.  

We should also be discussing eliminating fossil fuel subsidies or redirecting those subsidies. Governments still spend hundreds of billions on fossil fuel subsidies. In 2020, global governments spent $181.5bn on fossil fuel subsidies. This number is down from the high of $589.5bn spent in 2013, and the trend is in the right direction. However, for the 10 years from 2011, through 2020, governments spent more than $4trn subsidising fossil fuels. Shifting that money to non-fossil fuel sources would go a long way to getting us to where we need to be.

The European Union, Canada and a few other nations have already adopted climate legislation, with more undoubtedly coming in the years to come.

In just the past few months, Australia has been working on its own climate change-related laws. Legislation was recently passed by the Australian House of Representatives and is awaiting expected action by the Senate in September. The law aims to reduce greenhouse gas (GHG) emissions by 43% below 2005 levels by 2030, on a way to net zero by 2050. The cost of the law has not been made public at this time.

And in the US the IRA has the potential to reduce net GHG emissions in the country by 31% to 44% below 2005 levels by 2030, although this is still shy of the goal of 50% reduction that is needed to be on target for net zero by 2050.

Net zero still leaves CO2 PPM too high

We must be careful not to focus myopically on the net-zero question. We shouldn’t lose sight of the fact that if all we do is meet net-zero goals by 2050, we still will have failed. Net zero by 2050 is important, but only addresses part of the problem. If all GHG ended today, we would still have a big problem.

We must deal with the CO2 and other GHG that are already in our atmosphere. This is a separate problem that will require its own financial commitments to rewild, reforest, sequester carbon, and invest in the creation and scaling of technologies to help us pull that CO2 PPM down to a safe level. The current level of about 419 ppm is still much too high, and to get back to a “safe” ppm CO2 reading would require us getting those levels below 300 ppm.

See also: ESG Clarity’s Net Zero Database

Net zero by 2050 and bending the CO2 ppm curve in the right direction will happen outside the world of finance. To hit these goals, we as human beings will need to change the way we live. This will have impacts on how we travel, what we eat, where we live, how we work and many other aspects of our daily lives.

These things will not be changed by finance. They will be changed by policymakers and lawmakers setting incentives through laws and regulation. Investors can, in some cases, anticipate these changes, but for the most part our investments will at best reflect the world that we live in, not perfectly anticipate the future.  

Making more investments as taxpayers into climate legislation and policy today will allow us to benefit as investors in climate solutions in the future. Not making such an investment today comes with the very real risk of not having markets to invest in in the future.