Researchers at the Potsdam Institute for Climate Impact Research have found that last time CO2 levels were as high as they are now, was during the Pliocene era some three million years ago.  At that time, average temperatures were 2-3˚C higher than pre-industrial levels, whilst sea levels were about 25 metres higher than they are today.

Should sea levels rise that much, entire countries will be wiped off the map and billions of people will become homeless.  Fortunately, that is not likely to happen anytime soon, but a rise of only a metre or two will still cause huge problems.  Unless governments start to take this problem seriously – and some argue they do but, as you will see in a moment, they don’t – a metre or two by the turn of the century is not only possible, it is the most likely outcome!

1-2 metres will be enough to put many small islands around the world under water, and some of the most populous cities in the world will be flooded.  In no particular order, I can think of London, New York, Rotterdam, Shanghai, Mumbai and Jakarta, but I am sure many others could be added to that list.

The challenge we are up against is that, whilst most of our political leaders talk the talk, few of them have demonstrated any desire to take decisive action.  At the climate conference in Paris back in 2015, it was agreed to take measures to limit the rise in the average, global temperature from pre-industrial levels to max. 2˚C.  In subsequent negotiations, the +2˚C threshold was reduced to +1.5˚C, but most countries haven’t done what they committed to. Consequently, according to the latest research conducted by the UN, we are now heading towards +2.5˚C (+/-), i.e. temperatures in line with what we experienced in the Pliocene era some three million years ago.

The near-term fix

As things stand, CO2 is a massive liability.  However, our scientists have a plan, and that plan is to turn what is a liability today into an asset.  However, implementation is still years away so, to get the climate crisis under control before it is too late, an interim solution is needed, and that solution is probably Carbon Capture and Storage or CCS for short.  (For full transparency, I should point out that, even before CCS has been fully implemented,  the world has moved to the next stage – see later about CCUS.)

CCS involves the capture of CO2 emissions from the burning of fossil fuels.  The captured carbon is then compressed and transported from where it was produced, either via pipelines, road transport or ships, to an underground location, where it is stored by injecting it into rock formations.  You can read more about the CCS process here or here.  

When the CCS methodology is deployed, the compressed carbon biproduct is buried in underground reservoirs.  This process is not 100% carbon-free, though, nor is it cheap.  The EU carbon permit price is hovering around $75/tonne of CO2 emitted; however, as you can see in Exhibit 3 below, higher carbon permit prices shall be required before many industries will find it cost-effective to deploy the CCS technology rather than just pay the carbon tax.

That said, the appetite for the CCS technology is definitely on the rise.  As you can see in Exhibit 4, after a handful of years with dwindling interest, CO2 capture and storage capacity is on the rise again, which is most likely a function of higher carbon permit prices more recently.   Adding to that, many new CCS facilities are currently under construction, meaning that total capacity will continue to grow quite robustly over the next few years.

The medium-term fix

As indicated earlier, CCS is (sort of) yesterday’s story already.  Scientists have already moved on and are now working on another technology called CCUS (carbon capture, use and storage).  The underlying idea is quite simple.  Rather than just storing the compressed CO2, CCUS is about re-using the captured carbon instead of storing it.  This will almost certainly shorten the path to Net Zero.  The good news is that this technology is now knocking on our front door.

As per McKinsey, “CCUS doesn’t diminish the need to continue reducing CO2 emissions in other ways – for instance, by using more renewable energy, such as wind and solar power.  But it offers considerable potential for reducing emissions in particularly hard-to-abate sectors, such as cement and steel production”.

According to Goldman Sachs, adopting the CCUS technology could result in a dramatic drop in CO2 emissions quite quickly.  Take for example existing hydrogen plants, of which there are quite a few.  Emissions from those plants will be reduced by no less than 90%, if the CCUS technology is adopted.  Adding to that, no major investments shall be required, as no existing infrastructure needs to be retired and replaced.  This would make it possible to quickly scale up the production of low-carbon hydrogen in countries where renewable energy sources are not easily available (or affordable).  There can therefore be no doubt that CCUS offers a relatively quick and cost-effective path to Net Zero.

The real solution

The story gets even better, though.  When you let an electric current pass through water (H2O), you separate the two components of water, hydrogen (H) and oxygen (O).  This process is known as electrolysis and can be used to produce liquid hydrogen-based fuels such as diesel oil or jet fuel.  By only using electricity from renewable energy sources like wind or solar, the fuel is green.  By 2025, the largest supplier of aviation fuel in Denmark, Arcadia, plans to deliver the first green jet fuel (see the story here), and the plan is to supply most of the jet fuel used on aircraft, flying into and out of Denmark, by 2030 – about 500 million litres annually.

The technology behind this combines conventional electrolysis and a process called DAC (Direct Air Capture).  The jet fuel is produced by turning the hydrogen produced in the electrolysis process into methanol.  At first, the hydrogen released is a gas but, by having it react with the CO2 captured directly from the air, it is turned into liquid hydrogen (methanol), which is safe to use in transportation vehicles.  Once implemented worldwide, it could be a game changer, as CO2 emissions could suddenly turn negative.  Furthermore, the technology is virtually infinitely scalable.  You can read more about DAC here.

Green hydrogen – turning electricity generated by renewable energy sources into liquid hydrogen, which can be used as a transportation fuel – offers the ultimate solution to the CO2 problem but, as you can see in Exhibit 5 above, electrolysis is still a comparatively expensive process.  Having said that, we were almost at parity only a few weeks before COP27, but the recent correction in gas prices has opened up the gap again.

Now, as most of us are keen to reduce the dependence on Russian fossil fuels, as not all transportation vehicles are suited for electrification, and as the price on most new technologies almost always comes down quite dramatically as the technology in question is rolled out more widely, it would be foolish not to consider green hydrogen a serious challenger to electricity as the predominant transportation fuel in the years to come.

Investment opportunities  

The opportunity set when investing in climate-protecting technologies is massive, but there is one factor that will have a bigger impact than anything else, and that is the price of carbon permits (the carbon tax, so to speak).  As I pointed out earlier, the carbon permit price is currently hovering around $75 per tonne of CO2 emitted.  The good news, from a climate point-of-view, is that, in a capitalist economy, if higher prices are needed to settle a problem, those higher prices will sooner or later be a reality.

Therefore, carbon permits should make up a meaningful part of any climate-conscious portfolio.  I can’t make any promises as far as timing is concerned, but carbon permits will most likely trade well above $100 within a handful of years.  Investors can diversify (as we have done) by going long a mix of EU and Californian carbon permits, or one can choose to invest in only one of them.  There are indeed others, but those two are by far the most liquid carbon instruments.  Just be prepared for a fair amount of volatility.  It is not unheard of that carbon permits move 10% intraday (in either direction).  You may therefore need a bit of ice in your stomach.

As far as other investment opportunities are concerned, according to Goldman Sachs, no less than €10Tn will be spent by EU27 + the UK between now and 2050 to transform the European energy infrastructure on the path to Net Zero.  As you can see in Exhibit 6 below, the opportunity set is very broad.

As long-term readers of my work will be aware, at least until our electricity storage capabilities improve, it will prove counterproductive to allow wind and solar to account for a very high proportion of total primary energy supplies.  In my home country, Denmark, wind already accounts for over 60%, which makes electricity very cheap on windy days but un-affordably expensive on days with little or no wind.  As my wife pointed out the other day, “no long showers today – it is not windy enough!”.  Such a pricing model isn’t good for the economy, and I would strongly advise other countries not to go as far with renewables as Denmark has done – for now at least.

Although scientists frequently warn about this, I am not sure the penny has dropped in political circles yet but, when it does, I wouldn’t be surprised if the appetite for wind and solar cools off a little bit, and nuclear makes a return.  Therefore, of all the opportunities listed by Goldman Sacha above, in the pecking order, I would rank uranium near the top and wind and solar well down the list.  The obvious caveat is that, if (when) there is a major breakthrough on the power storage technology, I will most likely change my view instantly.

Overall conclusion

The problem humanity is up against is that the ongoing climate change is not a function of current, excessive levels of CO2 emissions but of aggregate emissions since the early days of the industrial revolution, when man began to play silly games with Mother Nature.  In other words, by simply arresting current CO2 emissions, you don’t achieve much.  The damage may already have been done.

Assuming António Guterres is correct, turning Net Zero – i.e. removing as much CO2 as is produced – by 2050 will therefore not be nearly enough to fix the climate problem.  The ship will already have sunk.  We need to go one step further and, as quickly as possible, remove more CO2 than we produce; i.e. we need to start decarbonising ASAP.

The path to decarbonisation will be dictated by (i) political willingness and (ii) technological innovation.  In the context of political willingness, COP27 ended last Sunday morning with an ‘injury time’ agreement that, in the words of Pakistan’s climate minister, Sherry Rehman, was “an investment in climate justice”.  The world’s richest countries agreed to establish a fund to pay for climate-related damage in poorer countries – an agreement seen as a major victory for the poorer countries.

However, the attendees couldn’t agree to greater CO2 cuts or, for that matter, cuts on any other greenhouse gas emissions.  Neither could they agree to end the use of fossil fuels.  According to Financial Times, the attempt to reach an agreement to phase out all fossil fuels was unsuccessful after staunch resistance, particularly from Saudi Arabia and Russia.  Effectively, this means that fossil fuels will be with us for many years to come.  Even if we, relatively soon, manage to completely phase out fossil fuels in our part of the world, there is little appetite to do so in certain parts of the world.  From a climate point-of-view, that is seriously bad news, as CO2 does not recognise the concept of borders.  We will all suffer.

As far as technology innovation is concerned, I hope that you, after having read this research paper, can see that there are enough new technologies on the drawing board to fix the problem, so long as the political leadership can convince the electorate that high energy prices may be with us for much longer than we were all hoping for.  I will now ask my research team to look into how best to invest in all these new technologies.  

Niels C. Jensen

23 November 2022