Achieving Net Zero: The path to a carbon-neutral world

2020 marked the end of the hottest decade on record. With global greenhouse gas (GHG) emissions having increased by almost 50% since 1990, actions to halt climate change are increasingly urgent. The 196 signatories of the 2016 Paris Climate Agreement agreed on the goal of limiting global warming this century to well below two degrees Celsius compared to pre-industrial levels, but most countries are not on track to meet their emissions reduction goals.

As environmental focus intensifies, achieving net zero emissions by 2050 has become the new benchmark among policymakers. Last year the UK and France became the first major economies to sign a net zero 2050 target into law. In total, 58 countries, representing 54% of global GHG emissions, have now communicated a net zero target and we expect this number to increase ahead of the UN Climate Change Conference of the Parties (COP26) scheduled for November in Glasgow, Scotland.

The ambition to achieve net zero is welcome; the implementation is a daunting task that will require major breakthroughs in climate technology to overcome the current hurdles. This piece aims to provide a framework to understand and address the challenges of getting to net zero by 2050, and the associated investment implications. We break it down into four main questions:

1. What is the size and scale of the challenge?
2. What are the best strategies to achieve net zero emissions?
3. What are the options for policymakers?
4. What are the key considerations for investors?

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Source: J.P. Morgan Asset Management

Conclusions

Dramatic changes to the global economy will be required if net zero emission targets are to be achieved by 2050. Quantifying the scale of the problem is a challenge in itself: calculations should account for a company or country’s size and stage of economic development, rather than looking at the volume of emissions alone. To reduce emissions, a combination of increased clean energy generation and electrification alongside improved efficiency will be required. Offsetting strategies will be needed to tackle the remaining unavoidable emissions, although these strategies are capacity constrained. For most industries, emission reduction rather than offset is required, and investors should view corporate commitments with this in mind.

Policymakers will be the key driver of change, by providing both carrots-based incentives to encourage investment, research and development, and also sticks-based measures such as carbon pricing schemes. Our research analysts see both opportunities and risks in their sectors: for industries such as logistics, we expect the strong to only get stronger, while in other areas such as energy, major technological breakthroughs will still be required. Following a decade of dominance for consumer-facing technology companies, companies that can achieve climate-based technology solutions look set to be the biggest beneficiaries of new environmental initiatives ahead. Regardless of the industry under consideration, a thorough understanding of how the wave of policy changes ahead will impact cash flows and valuations should be an essential part of any investment decision today.

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1 https://www.carbonbrief.org/guest-post-how-energy-efficient-led-bulbs-lit-up-india-in-just-five-years

2 Our World in Data – https://ourworldindata.org/global-land-for-agriculture

3 McKinsey: “Bridging infrastructure gaps: Has the world made progress?” 2017.

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