The Global Climate Summit hosted by US President Joe Biden in April was notable for several reasons. It involved countries from every continent and brought together (virtually, of course) leaders of major emerging and developed countries. So many heads of state speaking on climate change elevates the issue substantially and brings the critical risks to our climate to the fore, and each successive speech gave an indication of a country’s carbon reduction goals. Some were ambitious, some less so, some laid out a clear road map for achievement, some skated around the edges.
But what was generally consistent was that world leaders’ plan on deploying a heavy dose of policy sticks – that is, additional taxes and regulation to curb carbon emissions. One notable exception was Australian Prime Minister Scott Morrison who, by contrast, outlined several policy carrots – investments in potentially transformative technologies – that he believes will help his largely fossil-fuel reliant country, take on climate change.
Specifically, Mr Morrison highlighted hydrogen fuel cells and carbon capture and storage. While both are in the early stages of their development, they pose fascinating options for investors looking to enter early into this innovative space.
Hydrogen fuel cells
In 2019, Australia launched a multi-year initiative – H2 Under 2 – funded by state and federal governments to invest in technologies to produce green hydrogen at an economically viable cost of around $2 per kilogram. In his address at the Global Climate Summit, Mr Morrison noted Australia’s ambition to produce the cheapest clean hydrogen in the world. Hydrogen-powered fuel cells offer the ability to generate immense amounts of energy and recharge within minutes. They have the potential to decarbonise the most carbon-intensive sectors – like steel making and air transport – where renewable energy sources like solar and wind are simply not feasible options. And the deployment of this transformative technology may not be very far-off. European plane manufacturer Airbus, for example, is aiming to launch a hydrogen-powered plane for short-haul trips by 2035.
One challenge is that the most common way to produce hydrogen requires fossil fuels. However, a greener hydrogen-based energy source has been a central component of green fiscal stimulus plans outside of Australia as well. For example, the North Sea is emerging as a hub for production of “green hydrogen” with numerous projects underway using offshore wind power. Infrastructure to support storage and distribution, as well as a pipeline for tankers, will be coming online in the next year.
The benefits for governments to push forward research and development of hydrogen power are quite clear. For starters, it would help many of them meet their decarbonisation commitments and would also address energy independence vulnerabilities.
Carbon capture and storage
The other technology that has the potential to be a real game changer is carbon capture and storage (CCS). Direct air CCS essentially plucks carbon out of the air (powered by renewable energy, of course) and buries it deep underground or underwater in a solid state. In theory, if done at scale, it offers the promise of reducing the total level of greenhouse gases in the atmosphere.
Many of the technologies needed for this already exist – some firms with deep-sea energy extraction expertise are leading the charge in underwater carbon storage, for example – but others are nascent and scattered across the start-up landscape. Increases in efficiency of carbon capture are needed as well as integrating the capture technology with deep drilling and placement underground or underwater.
While technically feasible, direct air CCS is currently prohibitively expensive to capture and store carbon at scale, costing about $250 per metric tonne at the end of 2020, or over four times the going rate for carbon offsets in the European emissions trading system. The International Energy Agency has called for a 20-fold increase in CCS capacity over the next decade to meet global climate goals. Yet, investment in this technology is limited – accounting for less than 0.5 per cent of global investment in clean energy and efficiency – and Australia is one of the few active governments in the space.
The headlines coming out of the Global Climate Summit featured a series of grand pledges made by heads of state. However, promises by politicians to reduce carbon emissions may not be enough to avoid a climate crisis unless they are backed up by policy carrots – like tax credits and investment incentives – to spur technological innovation. For investors, monitoring these speculative technologies and assessing how they develop and disrupt different industries will be critical to navigating the inevitable shift to a lower-carbon world.
Shehriyar Antia, head of thematic research, PGIM
