Last week the International Energy Agency (IEA) has published its annual report (World Energy Outlook 2024), the most important source of data for those who are interested in energy politics and climate change. For the time being, the global production of fossil fuels – crude oil, coal and gas – continues to expand, but toward the end of the decade this will be the end of it, as well as the end of the ever rising emission of greenhouse gases. The world is about to reach an important turning point, even though the climate will not improve quickly and significantly in the following decades. Nor is it likely that the average temperature will begin to fall: too much of the environment has been destroyed in the past, and it takes very long to reduce the concentration of carbon dioxide and other greenhouse gases in the atmosphere. Moreover, emissions remain extremely high for years to come. Rising temperatures and climate catastrophes will be with us for at least the next generation.
In the central scenario of the IEA, the “Stated Policies Scenario”, CO2 emissions will be reduced from 37.7 billion tons last year, an all-time high, to 36.2 and 31.2 billion tons in 2030 and 2040, respectively. Even then they will not be significantly lower than. for instance, in 2010. While the energy intensity of global GDP is steadily declining, mostly a result of the secular reduction, in relative terms, of manufacturing in overall output, as well as ongoing efficiency gains, global energy production will on average rise by 0.7% annually between now and 2030, and by 0.2 percent in the following decade. Over this 17-year period, the share of renewables in total energy production will rise from 12 to 27 percent. The 1.5 degree target that had been unanimously agreed at the 2015 climate conference in Paris will not be reached this way. For now, the world seems to move toward a temperature increase of 2.4 degree. Real estate purchases in Florida are not a good idea for risk-averse investors.
Meanwhile, the structure of capital spending in the energy sector is changing in a dramatic way. Recently about 2 trillion dollars went into “green” projects annually, twice as much as into the energy production from crude oil, gas and coal. The cost of producing energy from green sources continues to fall – which makes alternative energy cheaper in both absolute and relative terms, and therefore increasingly attractive. Electricity demand will rise briskly for the foreseeable future but will no longer depend on burning fossil fuels. A collateral of this is that the prices of oil and gas, and especially for coal, will fall long-term, unless there is a major and protracted war in the Near East. The IEA expects supply overhangs of crude oil, but also of solar panels and batteries in the second half of the present decade.
China is by far the most important driver of structural changes in the energy sector. At the beginning of the thirties, the country’s solar panels alone will produce as much electricity as the US is consuming today. Let’s hope that this dominance in renewables will not lead to a trade war – which would cost the world deary and be a catastrophe for the climate.
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About Wermuth Asset Management
Wermuth Asset Management (WAM) is a Family Office which also acts as a BAFIN-regulated investment consultant.
The company specializes in climate impact investments across all asset classes, with a focus on EU “exponential organizations” as defined by Singularity University, i.e., companies which solve a major problem of humanity profitably and can grow exponentially. Through private equity, listed assets, infrastructure and real assets, the company invests through its own funds and third-party funds. WAM adheres to the UN Principles of Responsible Investing (UNPRI) and UN Compact and is a member of the Institutional Investor Group on Climate Change (IIGCC), the Global Impact Investing Network (GIIN) and the Divest-Invest Movement.
Jochen Wermuth founded WAM in 1999. He is a German climate impact investor who served on the steering committee of “Europeans for Divest Invest”. As of June 2017, he is also a member of the investment strategy committee for the EUR 24 billion German Sovereign Wealth Fund (KENFO).
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The information contained in this document is for informational purposes only and does not constitute investment advice. The opinions and valuations contained in this document are subject to change and reflect the viewpoint of Wermuth Asset Management in the current economic environment. No liability is assumed for the accuracy and completeness of the information. Past performance is not a reliable indication of current or future developments. The financial instruments mentioned are for illustrative purposes only and should not be construed as a direct offer or investment recommendation or advice. The securities listed have been selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the issues presented and do not necessarily form part of any portfolio or constitute recommendations by the portfolio managers. There is no guarantee that forecasts will occur.
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