The recently released Sustainability Trends Report 2023 provides an in-depth look at the progress and challenges of transitioning to a low-carbon economy. The report, produced by Generation Investment Management and its subsidiary Just Climate, examines developments in key sectors such as power, transportation, buildings, industry, land use, and financing.

While the report warns that the world still has a long way to go, it also highlights encouraging trends and policy developments that give hope that emission reductions consistent with the Paris Agreement goals can still be met. Here are some of the report's key findings:

The Power Sector Is Nearing Its Emissions Peak

According to the report, the power sector is making significant progress in reducing its reliance on fossil fuels. Electricity emissions may peak in the coming years before declining as renewable energy meets 80% of new power demand. Countries such as the United Kingdom and Germany have already decarbonized their power sectors significantly. However, developing countries continue to increase their use of coal, so reducing global emissions requires transition assistance for these countries.

Renewable energy gains have occurred despite supply chain disruptions, commodity inflation, and growing grid connection queues in many countries. Solar power experienced record growth in 2022 and is beginning to take market share away from fossil fuels. However, the report warns that significant grid expansion and storage, as well as increased renewable capacity, will be required. It also warns that China has accelerated the approval of new coal plants, putting the emissions peak in jeopardy.

Transportation Electrification Increasing

Electric vehicle adoption is accelerating, particularly in Europe and China, where EV sales have consistently exceeded 10% of the market. EV sales increased by 60% in 2022 and are expected to increase by 35% this year. While promising, EV supply shortages and infrastructure gaps continue to be obstacles. Obtaining adequate and ethically sourced battery materials is also critical. Aside from EVs, reducing transportation emissions necessitates significant investments in mass transit and urban densification to make cities less car-dependent.

According to the report, EV growth has begun to flatten oil demand, but slowing the growth of private car use is also critical. It emphasises the importance of policies other than vehicle electrification, such as congestion charging, to limit excessive car use. Cycling expansion in cities is another critical strategy, as seen in Amsterdam and Paris. The report contends that sustainable biofuels will be required for difficult-to-electrify modes of transportation such as aviation.

Building Progress Is Still Slow

When accounting for electricity use, buildings account for nearly 40% of global emissions. However, most countries' building efficiency regulations remain deficient. The EU is now considering requiring retrofits for the worst-performing buildings. Heat pumps are beginning to displace gas heating in some markets, but in most countries, they account for less than 5% of installations. Real progress will almost certainly necessitate mandating building upgrades at the time of sale and overhauling home appliance efficiency standards.

The report emphasises the difficulty of upgrading existing building stock, with low-income households having the most difficulty affording retrofits. It contends that smart policies and public funding are essential for accelerating retrofits. One model is the EU's proposed mandated building upgrades. Even new buildings, however, frequently fail to meet optimal efficiency standards. The report emphasises the global need for stricter building codes and enforcement. As renewable energy grows, it also highlights opportunities to manage building energy use in response to grid conditions.

In the industry, hydrogen hype outpaces reality.

The most difficult to reduce have been industrial emissions. However, interest in clean hydrogen is growing, with over 200 new project announcements last year. Costs continue to rise, and many planned projects are highly speculative. Contrary to popular belief, hydrogen has limited application in buildings and transportation. Priority should be given to difficult-to-decarbonize industries such as steel and chemical manufacturing. Progress on cement and plastics emissions is also required.

According to the report, governments should be cautious with hydrogen subsidies as fossil fuel interests try to use hydrogen to maintain market share. While hydrogen plays a role in decarbonization, the report states that its ultimate uses and costs are unknown. It emphasises that hydrogen is not a panacea, and that other strategies such as renewable heat, energy efficiency, and carbon capture will be critical throughout industry. The scale of investment required remains far below what is required to decarbonize industry completely by mid-century.

Efforts to Reduce Deforestation Gain Steam  

Over 140 countries agreed to the 30x30 target, which aims to conserve 30% of lands and oceans by 2030. The EU also agreed to prohibit imports linked to deforestation. However, continued meat demand drives agricultural expansion, necessitating far more efficient food production. Voluntary carbon offset markets have suffered setbacks due to integrity concerns, highlighting the need for stronger regulation.

According to the report, if commitments are met, the 30x30 agreement could be a watershed moment. However, it is noted that previous conservation pledges have been delivered late. It highlights signs of progress, such as the election of a Brazilian president committed to protecting the Amazon. However, global meat consumption continues to rise, fueling deforestation for pasture and feed crops. This necessitates the need for long-term agricultural intensification. The report also emphasises that offset credibility issues highlight the critical importance of strong offset standards and claims regulation.

Clean investment is booming, but more is required.

Global clean energy investment has surpassed fossil fuel investment by 70%, indicating a promising trend. However, total investment remains far below the $5 trillion per year that is likely to be required by 2030. Capital flows to agriculture, industry, and buildings trail those to renewable energy and electric vehicles. In developing countries, higher project costs are a major impediment.

The report emphasises that, while investment is increasing, the rate of growth must accelerate dramatically. It cites agriculture and industry as examples of sectors that require significantly more investment. Government fossil fuel subsidies, on the other hand, have rebounded after previously declining. According to the report, closing the cost gap for clean energy projects in emerging markets may be the single most important financing priority.

Important Takeaways

The Sustainability Trends Report emphasises both the impressive momentum in areas such as renewable energy and electric vehicles, as well as the urgent need for faster progress across all sectors, particularly laggards such as industry and buildings. While there are reasons to be optimistic, the report emphasises how much work remains to be done and how short the timeframe is, with emissions needing to be cut in half by 2030. It is clear that governments must enact far stronger policies as soon as possible, and that financial flows into clean solutions must accelerate as well. The report asserts that the Paris climate goals are still achievable with unprecedented investment and political will, but current trends are far from sufficient.

Source: https://str2023.generationim.com/chapters/introduction