Technology and the Climate Challenge
What is the
'Climate Challenge'?
Global temperatures are +1.2°C higher than
pre-industrial levels, which has resulted in an increase in the frequency and severity of extreme weather events. Every tonne of CO2 emissions contributes to global warming and fossil fuels still provide 80% of global energy, with energy-related emissions in transport, industry and heating making up 77% of global carbon emissions.
The World Economic Forum’s 2021 Global Risks Report ranked ‘climate action failure’ as the most impactful and second most likely long-term risk facing the world today.
How can the climate challenge be met?
The first three bullet points on the French government’s Major Future Economic Challenges report summary neatly answers this question at a high level: policy, capital and technology.
The climate emergency calls for swift and large-scale action -
The fight will be expensive -
Success will depend on technological breakthroughs -
All the technologies need to achieve the necessary deep cuts in global emissions by 2030 already exist, and the policies that can drive their deployment are already proven.
The optimistic view is that the adoption of the required measures will be driven by further changes in public opinion in the face of new evidence and what people do in response to the threat – just as we saw in response to covid.
IEA
The second and third points concern the Trust directly and help explain why we are so confident in the sector’s criticality in addressing this existential challenge.
Policy
Climate action will require a swathe of regulations, incentives, subsidies, taxes and public policy choices.
Capital
Capital requirements to reach a net zero scenario are enormous.
Technology
The most significant aspect of realising net zero ambitions is, by far, the decarbonisation of the energy sector.
Policy
Climate action will require a swathe of regulations, incentives, subsidies, taxes and public policy choices. It is encouraging to see countries covering 88% of global CO2 emissions, 90% of GDP and 85% of population making Net Zero commitments, but the majority of pledges are not supported by policies, actions or capital to make them credible in the near-term or long-term. Current mitigation pledges for 2030 would achieve between one third and two thirds of the emissions required to limit warming to 1.5-2.0°C.
There are, however, some solid policy milestones. The European Commission has introduced plans for reducing GHG missions by 55% by 2030 (versus a 1990 baseline) on the path to climate neutrality by 2050. The UK government has gone a stage further, setting into law the requirement to cut emissions by 78% by 2035 versus 1990 levels, bringing forward the prior ‘80% by 2050’ target. The UK has, in fact, already brought down emissions by 44% since 1990. President Biden re-joined the Paris Agreement on his first day in office and reaffirmed the goal of achieving Net Zero GHG emissions by 2050 via an Executive Order, but legislative and investment outcomes to realise that goal have been slim. President Xi announced China’s commitment to reach “carbon neutrality before 2060” and submitted its target to the UN in October 2021, but has not yet enshrined it in law.
Capital
Capital requirements to reach a net zero scenario are enormous. Estimates vary, but the requirement for a regime change in terms of the capital allocated to the transition and a fundamental shift in the nature of the global economy is consistent across all. The Glasgow Financial Alliance for Net Zero (GFANZ) assumes an investment requirement of between $100trn and $150trn, based on range of estimates for 1.5°C aligned net-zero scenarios from IEA, NGFS, IRENA and BloombergNEF.
McKinsey estimates capital spending on a successful Net Zero transition between 2021 and 2050 would require $275trn, about $9.2trn per year - an increase of $3.5trn per year versus today’s levels. $3.5trn is about half of 2020 total global corporate profits, a quarter of all tax revenue or 7.6% of global GDP. Goldman Sachs estimates $3trn in ‘Green Capex’ per year is required to support the move to Net Zero, plus an additional $3trn in water and infrastructure capex. The scale of capital formation and deployment required appears almost overwhelming, but this is to be expected given under a net-zero emissions pathway the global economy would be 40% larger in 2030 than 2020, but would use 7% less energy.
The risk of inaction is also substantial: Moody’s estimate a financial cost of $54-$69trn from health, water, air and extreme weather damage by 2100, even if the world remains within a 2°C limit. The role of capital markets will be substantial, given public spending on renewable energy as part of economic recovery packages has only offered about one-third of the required capital required to “jolt the energy system onto a new set of rails”. It is notable –and somewhat worrying – that private R&D on green technologies makes up only 4% of total world R&D, “chicken feed in view of the stakes”.
Technology
The most significant aspect of realizing net zero ambitions is, by far, the decarbonisation of the energy sector, which is responsible for around three-quarters of GHG emissions. This requires a step change in the annual rate of energy intensity improvements, averaging 4% through 2030, about three times the rate over the past 20 years. If we use the IEA’s ‘Key Pillars of Decarbonisation’ as a reference, a net zero scenario requires a broad range of technologies to decarbonise the global energy system. Indeed, “the complete transformation of how we produce, transport and consume energy” required is of a magnitude that can only be delivered by rapid and widespread adoption of new technologies. Behavioural changes to ‘avoid demand’ only account for 4% of reduced emissions under the IEA’s Net Zero Scenario, demonstrated by the fact that despite widespread lockdowns and ongoing travel and activity restrictions during 2020, primary global energy consumption only fell by -4.5% and carbon emissions by -6.3% during the year.
The good news is that that many of the crucial technologies to reach the net zero goal are ramping up just in time. In most markets, solar PV or wind already represent the cheapest source of new electricity. Each Electric Vehicle (EV) can help avoid 2 tonnes of CO2 emissions by replacing an ICE vehicle. The incremental cost of net zero carbon continues to improve as technologies mature and the cost of capital for low-carbon developments decreases and the cost of capital for high-carbon developments increases. In fact, Goldman Sachs found that around one-third of cost reduction in solar and wind power since 2010 was driven by lower cost of capital, with the remainder derived from technological and operational improvements.
Spotlight on:
Spotlight on:
Solar has seen an exponential cost improvement and deployment since its early development in the 1970s. In 2012 the International Energy Agency (IEA) assumed solar generation would reach 550 TWh in 2030, but this was surpassed by 2018. As a recent study put it: The combination of exponentially decreasing costs and rapid exponentially increasing deployment is different to anything observed in any other energy technologies in the past, and positions renewables to challenge the dominance of fossil fuels within a decade.
This was not expected. A meta-analysis of 2,905
projections for the annual rate at which solar PV system investment costs would fall between 2010-2020 found an average projection of -2.6% annually, and all studies projected cost declines of less than -6% per annum. Solar PV costs actually fell at -15% per annum during the period. To understand the implications of this change, it is worth considering that Germany used to pay German farmers #0.40/kw/h to run solar PV, whereas a recent solar power auction in Portugalsaw a price of #0.01/kw/h, a -97% decline.
One of the most interesting aspects of this extraordinary change is the impact of learning
curves, or ‘learning by doing’ on solar – a phenomenon absent from electricity generated
from fossil fuels. Technologies that follow learning curves (such as renewables) typically see their price halve with every doubling of cumulative installed
capacity. The doubling of ‘experience’ leading to the same relative decline in prices was first noted by aerospace engineer Theodore Paul Wright in 1936, and was dubbed Wright’s Law. For example, recent research on the impact of World War II on the demand for military products indicates that the exogenous stimulation of demand (such as a war or a climate crisis) can drive down costs resulting from increasing cumulative production (i.e. learning by doing).
Figure 1: Historical PV cost forecasts and floor costs. The blue dots show the observed global average levelized cost of electricity (LCOE) over time. Red lines are LCOE projections reported by the International Energy Agency (IEA),orange lines are integrated assessment model (IAM) LCOE projections reported in 2014 and yellow lines are IAM projections reported in 2018.
The most important question is whether it is feasible for renewables (largely solar and wind) to reach the >55% supply of global electricity generation by 2030 (and 100% by 2050) consistent with a net zero scenario. A study in Nature Energy suggested that in countries where solar growth has stabilised at a maximum rate, its annual share growth of the total electricity supply has increased at 0.6ppts per annum – well below the 1.4ppts needed under a 1.5°C scenario. The question is primarily one of timing rather than capacity, as a recent study indicated that solar and wind potential energy is already as much as 100x global energy demand. We remain optimistic that future innovation will continue to drive down the cost of electricity, although storage remains a big
hurdle to a fully-decarbonised grid (see below).
Storage
Due to the intermittent nature of both solar and wind power, it is vital that energy storage solutions are able to keep pace with the development and deployment of renewable energy generation technologies. The two most significant areas of technology development are batteries and hydrogen. Policy support looks increasingly robust with specific provision for energy storage including standalone storage ITCs in the US, the EU’s Green Deal and China’s 14th 5-year plan.
Solar: why a technology is different to an extractive process
Batteries
Spotlight on:
Battery costs have fallen by more than 50% in the past five years as investments to meet EV demand have increased global capacity.
The majority of the reduction in cost has been derived from improvements in the battery pack (including battery management systems), but c.80% of the cost sits in the battery cell, which requires further innovation and R&D – especially in materials science given c.80% of cell costs are materials.
Batteries are likely to represent a $200bn opportunity over the next decade and battery storage installations could grow at a 30% CAGR. China – the main driver of the increase in new battery ESS capacity since 2018 - has release a target for energy storage capacity (excluding hydro) to reach 30GW by 2025 (10x from 3.3GW in 2020), but provincial government targets suggest this could be as high as 45GW. The Trust hold a position in Chinese EV battery leader BYD which looks well-positioned to benefit from this trend longer-term.
As with historical solar cost and performance improvement, batteries also enjoy a declining cost curve, albeit at a slower rate than solar has managed historically, perhaps halving by 2030. Aggressive investments from auto OEMs and their battery suppliers will also held to drive the cost curve down and more than triple global manufacturing capacity for stationary battery storage. However, there are still no feasible costeffective solutions for the type of long duration energy storage required to manage long duration imbalances in a decarbonized grid where variable renewable energy makes up >80% of energy
supply.
Hydrogen
Spotlight on:
Hydrogen is likely to take on a more meaningful
role in combating climate change. While direct
electrification’s use from 20% of final energy
demand today to reach 70% by 2050 is the major
driver of a net zero scenario (assuming electricity
used is generated from renewable sources), direct
electrification is not possible or economic in many
critical industries. Hydrogen’s high energy density per
mass means it will likely play a leading role in steel,
long-distance shipping and other heavy industries
and make up 15-20% of final energy demand, on
top of the 70% provided by direct electricity. Its
high energy density and low energy loss also makes
it a strong candidate to augment batteries for grid
balancing in renewables-led energy systems, despite
the fact that power-hydrogen-power reconversion
losses are significant. Hydrogen would be produced
via electrolysis when (renewable) power supply
outstrips demand, and then reconverted to electricity
when demand exceeds supply or when supply is
constrained (e.g. at night for solar). Global hydrogen use could grow 5-7x from 115Mt per annum to 500-800Mt by the middle of the century.
Again, the technological impetus is positive
here. Total installed capacity for green hydrogen
production was 0.3GW in 2020, but current project
pipeline indicates capacity of up to 80GW-120GW
could be available by 2030. More than 30 national
hydrogen strategies pledge a 400-fold increase in
clean hydrogen installed capacity by 2030 versus
2020, and the potential for clean hydrogen to
reach cost parity with diesel for long haul trucking
as soon as 2027. The US has recently allocated
$9bn to develop domestic clean hydrogen capacity.
Clean hydrogen could support the decarbonization
of c.15% of GHG emissions, although this will
require up to $5trn of investment to support the
clean hydrogen supply chain for net zero. This
could see green hydrogen reaching cost parity
with grey hydrogen as early as 2026 in some
regions, and demonstration projects have shown
green hydrogen generated from electrolysis can be
competitive with hydrogen from steam-methane
reforming or autothermal reforming of natural gas.
Technological Innovation
Digital technology’s role in tackling the climate challenge is more comprehensive than many believe. Industry studies have indicated that the ambitious application of digital technology could help deliver one-third of the emissions reductions required by 2030 for a pathway to an outcome well below 2 degrees. We consider three structural trends that we believe will play a pivotal role in the technology sector’s contribution to addressing the climate challenge which indicate the Trust’s alignment with this vital task: the ongoing move to the cloud, the rise of AI and ML, and the increasing importance of semiconductors in the world.
The technology sector itself emits somewhere between 1.8% and 3.9% of annual GHG emissions, depending on where the boundaries are drawn and how supply chain and lifecycle impact are accounted for. Megacap tech rightly comes under close scrutiny, but has shown leadership in this area: Microsoft plans to be carbon negative by 2030, Apple uses 100% renewable energy and will be 100% carbon neutral for its supply chain by 2030, Google became carbon neutral in 2007 and will be carbon free by 2030. Even Amazon has pledged carbon neutrality by 2040 and to use renewables to power its operations by 2025.
Accenture found IaaS migrations can reduce carbon
emissions by more than 84% and energy usage by 65% compared with conventional infrastructure. AWS infrastructure is 3.6x more energy efficient that the median US enterprise datacentre, mainly due to more efficient servers and higher utilisation rates. Microsoft found a 10,000 user study indicated a 93% carbon emission reduction from energy savings and Microsoft’s renewable electricity purchases. More importantly, despite concerns about the growing energy draw from hyperscale data centres, recent IEA research suggests the energy demand from data centres has barely increased during the past decade (200-250TWh or about 1% of global energy) even as traffic has grown at a 30% CAGR (15x).
However, data centres can still represent huge electricity demand loads and put pressure on electricity grids, especially in smaller or less developed countries. It is also worth noting that taking bitcoin mining activities into account would result in a c.50-75% increase to the global data centre power demand.
Technology is critical to enabling successful
adaptation, especially over a compressed time
frame. Artificial Intelligence (AI) and Machine
Learning (ML) can help reduce GHG emissions
and help society adapt to a changing climate
just as mRNA-based vaccines proved pivotal in
tackling the threat from covid. The landscape of issues to which ML and AI technologies can be applied is vast. This includes the dynamic forecasting and solving of supply/demand/capacity optimization problems in the energy network, accelerating materials science discovery, fusion science, reducing current system impacts, driving efficiencies in transport networks, optimizing buildings and countless other applications. A study found AI alone could save up to 4% of GHG emissions by 2030 and create 18m-38m net new jobs globally driven by optimized use of inputs, higher output productivity and automation of manual and routine tasks.
One of the most significant impacts in the near term is AI is in better predicting and analyzing which near term energy efficiency measures actually work; for example, actual building emissions are around 2-3x predicted levels. The ability to use AI to optimize the design and operation of complex adaptive systems including cities, transport and logistics networks and
even entire ecosystems provides an enormous opportunity to understand better and solve for the decarbonisation of those systems. The Trust owns a number of companies supplying critical technology to enable such AI-led improvement, including chipmakers AMD and NVIDIA, DRAM manufacturer Micron, HDD supplier Seagate, and their cloud company customers who will ultimately host most of the AI and ML-focused workloads.
AI may also be well-placed to accelerate practical nuclear fusion, a more controversial but potentially
highly impactful part of the future clean energy mix. DeepMind (part of Alphabet) published a recent paper in which they demonstrated the potential for deep reinforcement learning to control plasma in a tokamak, which some believe is fundamental to successful nuclear fusion.
This example also points to another structural advantage AI can bring to speed up innovation
and increase the likelihood of success – synthetic data. DeepMind’s model was trained on a simulated environment before being applied to a real example (much more expensive). Given the cost and difficulty of acquired the massive datasets needed to address climate change, simulated environments and synthetic data are likely to play a key role in future innovation and understanding. We have provided a collection of graphics to give a sense of the potential scope of AI’s impact.
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Policy
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Capital
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Technology
Technological Innovation
“Almost 50% of the emissions reductions needed in 2050 in the NZE depend on technologies that are at the prototype or demonstration stage”, including 30% of the cumulative emission reductions from using low-emission electricity, 75% from the use of hydrogen, 55% from the use of Carbon Capture, Utilization and storage (CCUS), and 45% from bioenergy. A huge amount of innovation is required to make net zero remotely feasible.
The most encouraging news for both the planet and the sector is innovation timelines for early stage clean energy technologies are running at faster rates than has been seen historically. Time from first prototype to market introduction is 20% faster than the fastest energy technology developments in the past. This reflects the increasing urgency of the threat from climate change, deeper capital markets and enhanced government support.
EXPLORE MORE
The role of digital technology, software, data and innovation
The move to the cloud helps reduce
carbon emissions
The rise of Artificial Intelligence and
Machine Learning
Investment implications
for the Trust
The Trust’s enhanced integration of ESG risks and opportunities into its investment process reflects the increasing importance of environmental issues
– see ESG section. Climate change will have an impact on every company in the portfolio just as economic change will. A recent consumer survey found 80% of 18-34 year olds view sustainability as somewhat or very important to their purchasing decisions, and given Gen Z and Millennials will make up 70% of consumers by 2028, so companies must have a strategy to reflect (and take advantage of) these changing consumer preferences. We will need to understand how companies are adapting their business models in light of climate change, and how they plan to navigate the second-order effects of the
transition to net zero as the intensity of regulation, investment and other activity increases. The Trust itself will also have to demonstrate its continued relevance to younger shareholders, showing the value of a publicly-traded, permanent capital vehicle to provide broad exposure to the technology space in a sustainable manner. We hope our early ESG efforts will provide a solid
foundation on which to build.
The risks associated with addressing the climate challenge
Technology and the climate challenge: what will happen?
The risks associated with addressing the climate challenge
Combating climate change is an existential necessity, but brings with it a wide array of risks which are not yet fully understood. Even the emergence of abundant, cheap renewable power is not an unalloyed good (see Jevons’ Paradox below). Second-order effects are likely to be meaningful, and climate policy is increasingly being subsumed into other policy areas in a way that can lead to unintended consequences and feedback loops.
Debt
The net zero transition will be very expensive. Given the regressive nature of carbon taxation (either directly via a carbon tax or indirectly via regulation), governments are likely to come under pressure to provide support to lower income households, in addition to the material public capital investment and private incentives required to finance the transition to net zero (renewable energy, transmission infrastructure, heating and buildings retrofits etc). Likewise, the burdens of carbon taxation will fall most heavily on those with carbon-intensive lifestyles – those who live in the suburbs rather than urban areas. The gilets jaunes are unlikely to be the last to make their voices heard protesting against carbon taxes, and the European Commission’s Emissions Trading Scheme (ETS) proposes 25% of resources from it are allocated to a dedicated Social Climate Fund.
There are also geopolitical headwinds to meeting the climate challenge which manifest themselves more acutely at times of stress. Soaring oil and gas prices will put upwards pressure on inflation and reduce the political will to limit fossil fuel exploitation. Energy has always been a highly politicised resource given its scarcity and importance, and a wider popular pushback against decarbonisation initiatives linked to concerns about inflation and the cost of living is likely.
On the other side, Russia’s actions in Ukraine have highlighted the necessity of energy independence and the need for a faster transition to a renewables-based system. Robert Hableck, Germany’s economic minister from the Green Party, is reviewing the possibility of keeping both coal and nuclear plants online to reduce dependence on Russian energy – an extraordinary volte-face given the Greens’ pro-environment, anti-nuclear pacifist roots. It seems entirely possible that the desire for energy independence – or at least reduced energy dependence – could lead countries to invest in both near-term GHGemitting relief measures (such as consumer energy bill subsidies) and a structural increase in renewable power simultaneously.
Jobs
McKinsey estimates the net zero transition could result in a gain of about 200m and a loss of about 185m jobs globally by 2050, although the impact of both losses and gains will not be shared evenly. ‘Wind turbine service technicians’ and ‘Solar photovoltaic installers’ are expected to be in the top 5 fastest-growing US occupations over the next decade, according to Bureau for Labour Statistics. The nature of some green subsidies skew them to the already affluent, as a 2016 US study found 60% of $18bn worth of income tax credits for weatherising homes, installing solar panels, buying EVs and other clean energy investments went to the top income quintile. The IEA argues global employment will be boosted in the energy sector in a net zero pathway scenario, with 14m jobs created directly by clean energy investments by 2030 versus 5m lost in the fossil fuel sector.
Inflation
Some research has characterised decarbonisation as “putting a price on a resource that used to be free”, and is thus best analysed as an adverse supply shock, along the lines of the oil shocks of the 1970s, “when a previously underpriced resource was suddenly revalued”.
Goldman Sachs estimates the transition path to net zero (expressed via linear increases in a carbon tax to $100/ton by 2030) would boost US headline PCE by 25bps annually, and about 10bps to core PCE inflation. The boost to inflation would be more meaningful the longer the transition is delayed, with a 10 year delay to start the transition resulting in carbon and energy prices 35% higher in 2050 than under the immediate transition scenario. A NIESR study suggested a sudden rise of $100 per tonne in a carbon tax applied across all economics would act as a fiscal tightening equivalent to 1-2% of GDP in most OECD countries and increase inflation by more than this.
The Federal Reserve set up two committees in March 2021 to examine risk that climate change poses to the broader financial system, but Chair Powell has since suggested climate change “is not something we directly consider in setting monetary policy”.The Fed will, however, provide supervisory guidance on climate change to help banks mitigate their exposure and develop scenario analysis, in line with other G7 central banks. The further politicisation of central bank policy with respect to climate change in addition to nearer-term economic conditions such as inflation and the labour market brings incremental complexity and risk to monetary policy considerations.
Interest rates
Interest rates are likely to see upward pressure given the effect of higher levels of investment needed to tackle risks from climate change. The transition to net zero is supportive of the argument that inflation and policy rates will settle above pre-pandemic levels, but it is notable that the impact looks broadly containable. A 2021 empirical study looking at the European and Canadian experience found “carbon taxes do not have to be inflationary and may even have deflationary effects”.
The net zero transition does not necessarily have negative implications for economic growth as the EU’s modelling on its climate plan assumes a -0.7% to +0.55% impact on GDP. The Bank of England’s work shows only moderate impact of climate policies on aggregate GDP in the Early Action scenario, which sees UK GDP growth dip temporarily to 1.4% between 2026-30, before recovering to 1.6%.
All projections should be treated very cautiously, as the BoE’s own research admits “expertise in modelling climate-related risks is in its infancy”. It is, however, highly likely that the composition of incremental growth will shift away from consumption in favour of investment. The IEA’s modelling suggests within the energy sector alone, global investments in energy would need to jump from 2.5% of global GDP 2016-20 to 4.5% by 2030, and the European Commission estimates an increase in the investment-to-GDP ratio by 1.5-1.8ppts to peak at 3% in 2030 (from 1% In 2010). All else equal, this would take the world investment ratio back above its 1980-89 level of 25.7%, from 24.3% 2010-19.
It is possible these investments will drive higher trend GDP growth via stimulating aggregate demand nearterm or productivity growth in the medium-term, but a more likely impact (to at least some degree) is a curtailment in the growth of consumption. The comparison with wartime investments is illuminating – resources are rapidly diverted to fund aggressive investment in something to protect people in the long run and can bring with it a meaningful increase in innovation, but near term consumption is pressured.
Technology and the climate challenge: what will happen?
Semiconductors' increasing prevalence and efficiency
Semiconductors' increasing prevalence and efficiency
Semiconductors are uniquely positioned as the underlying technology underpinning increasing energy efficiency, automation, EV adoption and the expansion of renewable energy. A recent Goldman Sachs study indicated semiconductors can enable avoidance of 5x more emissions than they emit. Lighting is a prosaic but significant example as in 2015 US DOE found lighting industry consumed up to 15% of global power (3,370TWh), which has declined to approximately 12% of global power (2,800TWh) since then via LED adoption. LEDs use at least 75% less energy and can last up to 25x longer than incandescent lighting.
In the PC market, a longstanding active position Trust’s, AMD, has achieved 31.7x energy efficiency gains between 2014 and 2020, and – combined with improvements in the power efficiency of memory chips alone has meant the power consumption of PCs being 4-22% lower than it otherwise would have been.AMD has committed to a further 30 increase in energy efficiency for AMD processors and accelerators powering servers for artificial intelligence training and highperformance computing (2020-2025).
Silicon carbide-based power semiconductors can run with 70-90% less energy loss compared to silicon-based chips, for example allowing longer ranges (+20%) and faster charging (>50%) for EVs. The silicon carbide market is estimated to grow at a c.54% CAGR 2021-24, to reach $5bn as these applications ramp up. Other power semiconductors such as IGBTs and MOSFETs are expected to see greater density as safe power management is an
integral part of a decarbonizing economy (as larger batteries and higher voltages become common in more products), potentially reaching a $25bn market by 2025 from $9bn in 2017.
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Batteries
Solar
HYDROGEN
The IPCC’s latest Assessment Report finds a >50% likelihood that global warming will reach or exceed 1.5°C in the near-term (2021-2040), and a recent report from the World Meteorological Organization and the UK Met Office suggested there is a 48% chance the world reaches 1.5°C in the next five years, so the odds of achieving a net zero scenario within a time frame that keeps 1.5°C in play are against. COP26 pledges (if fully implemented and achieved) would see the planet warm by 1.8°C, a significant improvement on the 2.1°C the IEA forecast before the summit.
The forecast temperature increases to 2.4°C when counting only the 2030 targets, which only cover a 17% cut to emissions versus the 50% required by this date. Given the ‘race to net zero’ is as much a policy and lobbying tool as a prescribed path of action, to fail to meet net zero targets brings heightened risks but not guaranteed devastation.
It is sometimes missed in the noise of climate activism and the need to push for further progress, but material progress has already been made. As Frances Moore, assistant professor at the University of California, put it regarding the global temperature increase: “Even 10 years ago, we would not have ruled out a 4°C or 5°C world, which is very different than a 2°C or 3°C world.”
The Trust’s enhanced integration of ESG risks and opportunities into its investment process reflects the increasing importance of environmental issues…We hope our early ESG efforts will provide a solid foundation on which to build.
McKinsey estimates the net zero transition could result in a gain of about 200m and a loss of about 185m jobs globally by 2050, although the impact of both losses and gains will not be shared evenly.
The annual boost to US headline PCE by the transition path to net-zero
25bps
EU’s modelling on its climate plan assumes a -0.7% to +0.55% impact on GDP
The Bank of England’s work on the net-zero transition shows UK GDP growth to dip temporarily to 1.4% between 2026-30, before recovering to 1.6%
The IEA’s modelling suggests within the energy sector alone, global investments in energy would need to jump from 2.5% of global GDP 2016-20 to 4.5% by 2030 to achieve net zero transition
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Climate science tells us it will be necessary to reach ‘Net Zero’ - the point at which the amount of greenhouse gases produced and amount removed from the atmosphere are in balance – by 2050 to limit global warming to +1.5°C versus pre-industrial levels and mitigate physical risks.
Global net human-caused emissions of CO2 need to fall by 55% in 2030 versus 2018 to put the world on the least-cost pathway to limit global warming to +1.5°C, and by 25% to limit it to +2.0°C. Even with a broad scientific consensus and countries responsible for >88% of global emissions committed to achieving Net Zero, the scale of the challenge remains eyewatering.
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Technology Trust plc
Technology and
the Climate Challenge
Climate science tells us it will be necessary to reach ‘Net Zero’ - the point at which the amount of greenhouse gases produced and amount removed from the atmosphere are in balance – by 2050 to limit global warming to +1.5°C versus pre-industrial levels and mitigate physical risks.
Global net human-caused emissions of CO2 need to fall by 55% in 2030 versus 2018 to put the world on the least-cost pathway to limit global warming to +1.5°C, and by 25% to limit it to +2.0°C. Even with a broad scientific consensus and countries responsible for >88% of global emissions committed to achieving Net Zero, the scale of the challenge remains eyewatering.
Global temperatures are +1.2°C higher than pre-industrial levels, which has resulted in an increase in the frequency and severity of extreme weather events. Every tonne of CO2 emissions contributes to global warming and fossil fuels still provide 80% of global energy, with energy-related emissions in transport, industry and heating making up 77% of global carbon emissions.
The World Economic Forum’s 2021 Global Risks Report ranked ‘climate action failure’ as the most impactful and second most likely long-term risk facing the world today.
What is the
'Climate Challenge'?
All the technologies need to achieve the necessary deep cuts in global emissions by 2030 already exist, and the policies that can drive their deployment are already proven.
IEA
The optimistic view is that the adoption of the required measures will be driven by further changes in public opinion in the face of new evidence and what people do in response to the threat – just as we saw in response to covid.
The second and third points concern the Trust directly and help explain why we are so confident in the sector’s criticality in addressing this existential challenge.
Technology
Success will depend on technological breakthroughs -
03
Capital
The fight will be expensive -
02
Policy
The climate emergency calls for swift and large-scale action -
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The first three bullet points on the French government’s Major Future Economic Challenges report summary neatly answers this question at a high level: policy, capital and technology.
How can the climate
challenge be met?
Policy
Climate action will require a swathe of regulations, incentives, subsidies, taxes and public policy choices.
01
Capital
Capital requirements to reach a net zero scenario are enormous.
02
Technology
The most significant aspect of realising net zero ambitions is, by far, the decarbonisation of the energy sector.
03
Policy
Climate action will require a swathe of regulations, incentives, subsidies, taxes and public policy choices. It is encouraging to see countries covering 88% of global CO2 emissions, 90% of GDP and 85% of population making Net Zero commitments, but the majority of pledges are not supported by policies, actions or capital to make them credible in the near-term or long-term. Current mitigation pledges for 2030 would achieve between one third and two thirds of the emissions required to limit warming to 1.5-2.0°C.
There are, however, some solid policy milestones. The European Commission has introduced plans for reducing GHG missions by 55% by 2030 (versus a 1990 baseline) on the path to climate neutrality by 2050. The UK government has gone a stage further, setting into law the requirement to cut emissions by 78% by 2035 versus 1990 levels, bringing forward the prior ‘80% by 2050’ target. The UK has, in fact, already brought down emissions by 44% since 1990. President Biden re-joined the Paris Agreement on his first day in office and reaffirmed the goal of achieving Net Zero GHG emissions by 2050 via an Executive Order, but legislative and investment outcomes to realise that goal have been slim. President Xi announced China’s commitment to reach “carbon neutrality before 2060” and submitted its target to the UN in October 2021, but has not yet enshrined it in law.
Capital
Capital requirements to reach a net zero scenario are enormous. Estimates vary, but the requirement for a regime change in terms of the capital allocated to the transition and a fundamental shift in the nature of the global economy is consistent across all. The Glasgow Financial Alliance for Net Zero (GFANZ) assumes an investment requirement of between $100trn and $150trn, based on range of estimates for 1.5°C aligned net-zero scenarios from IEA, NGFS, IRENA and BloombergNEF.
McKinsey estimates capital spending on a successful Net Zero transition between 2021 and 2050 would require $275trn, about $9.2trn per year - an increase of $3.5trn per year versus today’s levels. $3.5trn is about half of 2020 total global corporate profits, a quarter of all tax revenue or 7.6% of global GDP. Goldman Sachs estimates $3trn in ‘Green Capex’ per year is required to support the move to Net Zero, plus an additional $3trn in water and infrastructure capex. The scale of capital formation and deployment required appears almost overwhelming, but this is to be expected given under a net-zero emissions pathway the global economy would be 40% larger in 2030 than 2020, but would use 7% less energy.
The risk of inaction is also substantial: Moody’s estimate a financial cost of $54-$69trn from health, water, air and extreme weather damage by 2100, even if the world remains within a 2°C limit. The role of capital markets will be substantial, given public spending on renewable energy as part of economic recovery packages has only offered about one-third of the required capital required to “jolt the energy system onto a new set of rails”. It is notable –and somewhat worrying – that private R&D on green technologies makes up only 4% of total world R&D, “chicken feed in view of the stakes”.
Technology
The most significant aspect of realizing net zero ambitions is, by far, the decarbonisation of the energy sector, which is responsible for around three-quarters of GHG emissions. This requires a step change in the annual rate of energy intensity improvements, averaging 4% through 2030, about three times the rate over the past 20 years. If we use the IEA’s ‘Key Pillars of Decarbonisation’ as a reference, a net zero scenario requires a broad range of technologies to decarbonise the global energy system. Indeed, “the complete transformation of how we produce, transport and consume energy” required is of a magnitude that can only be delivered by rapid and widespread adoption of new technologies. Behavioural changes to ‘avoid demand’ only account for 4% of reduced emissions under the IEA’s Net Zero Scenario, demonstrated by the fact that despite widespread lockdowns and ongoing travel and activity restrictions during 2020, primary global energy consumption only fell by -4.5% and carbon emissions by -6.3% during the year.
The good news is that that many of the crucial technologies to reach the net zero goal are ramping up just in time. In most markets, solar PV or wind already represent the cheapest source of new electricity. Each Electric Vehicle (EV) can help avoid 2 tonnes of CO2 emissions by replacing an ICE vehicle. The incremental cost of net zero carbon continues to improve as technologies mature and the cost of capital for low-carbon developments decreases and the cost of capital for high-carbon developments increases. In fact, Goldman Sachs found that around one-third of cost reduction in solar and wind power since 2010 was driven by lower cost of capital, with the remainder derived from technological and operational improvements.
Spotlight on:
HYDROGEN
Batteries
Solar
Hydrogen
Spotlight on:
Hydrogen is likely to take on a more meaningful role in combating climate change. While direct electrification’s use from 20% of final energy demand today to reach 70% by 2050 is the major driver of a net zero scenario (assuming electricity used is generated from renewable sources), direct electrification is not possible or economic in many critical industries. Hydrogen’s high energy density per mass means it will likely play a leading role in steel, long-distance shipping and other heavy industries and make up 15-20% of final energy demand, on top of the 70% provided by direct electricity. Its high energy density and low energy loss also makes it a strong candidate to augment batteries for grid balancing in renewables-led energy systems, despite the fact that power-hydrogen-power reconversion losses are significant. Hydrogen would be produced via electrolysis when (renewable) power supply outstrips demand, and then reconverted to electricity when demand exceeds supply or when supply is
constrained (e.g. at night for solar). Global hydrogen use could grow 5-7x from 115Mt per annum to 500-800Mt by the middle of the century.
Again, the technological impetus is positive here. Total installed capacity for green hydrogen production was 0.3GW in 2020, but current project pipeline indicates capacity of up to 80GW-120GW could be available by 2030. More than 30 national hydrogen strategies pledge a 400-fold increase in clean hydrogen installed capacity by 2030 versus 2020, and the potential for clean hydrogen to
reach cost parity with diesel for long haul trucking as soon as 2027. The US has recently allocated $9bn to develop domestic clean hydrogen capacity. Clean hydrogen could support the decarbonization of c.15% of GHG emissions, although this will require up to $5trn of investment to support the clean hydrogen supply chain for net zero. This
could see green hydrogen reaching cost parity with grey hydrogen as early as 2026 in some regions, and demonstration projects have shown green hydrogen generated from electrolysis can be competitive with hydrogen from steam-methane reforming or autothermal reforming of natural gas.
Batteries
Spotlight on:
Battery costs have fallen by more than 50% in the past five years as investments to meet EV demand have increased global capacity.
The majority of the reduction in cost has been derived from improvements in the battery pack (including battery management systems), but c.80% of the cost sits in the battery cell, which requires further innovation and R&D – especially in materials science given c.80% of cell costs are materials.
Batteries are likely to represent a $200bn opportunity over the next decade and battery storage installations could grow at a 30% CAGR. China – the main driver of the increase in new battery ESS capacity since 2018 - has release a target for energy storage capacity (excluding hydro) to reach 30GW by 2025 (10x from 3.3GW in 2020), but provincial government targets suggest this could be as high as 45GW. The Trust hold a position in Chinese EV battery leader BYD which looks
well-positioned to benefit from this trend longer-term.
As with historical solar cost and performance improvement, batteries also enjoy a declining cost curve, albeit at a slower rate than solar has managed historically, perhaps halving by 2030. Aggressive investments from auto OEMs and their battery suppliers will also held to drive the cost curve down and more than triple global manufacturing capacity for stationary battery storage. However, there are still no feasible costeffective solutions for the type of long duration energy storage required to manage long duration imbalances in a decarbonized grid where variable renewable energy makes up >80% of energy supply.
Solar: why a technology is different to an extractive process
Spotlight on:
Solar has seen an exponential cost improvement and deployment since its early development in the 1970s. In 2012 the International Energy Agency (IEA) assumed solar generation would reach 550 TWh in 2030, but this was surpassed by 2018. As a recent study put it: The combination of exponentially decreasing costs and rapid exponentially increasing deployment is different to anything observed in any other energy technologies in the past, and positions renewables to challenge the dominance of fossil fuels within a decade.
This was not expected. A meta-analysis of 2,905 projections for the annual rate at which solar PV system investment costs would fall between 2010-2020 found an average projection of -2.6% annually, and all studies projected cost declines of less than -6% per annum. Solar PV costs actually fell at -15% per annum during the period. To understand the implications of this change, it is worth considering that Germany used to pay German farmers #0.40/kw/h to run solar PV, whereas a recent solar power auction in Portugalsaw a price of #0.01/kw/h, a -97% decline.
One of the most interesting aspects of this extraordinary change is the impact of learning curves, or ‘learning by doing’ on solar – a phenomenon absent from electricity generated from fossil fuels. Technologies that follow learning curves (such as renewables) typically see their price halve with every doubling of cumulative installed capacity. The doubling of ‘experience’ leading to the same relative decline in prices was first noted by aerospace engineer Theodore Paul Wright in 1936, and was dubbed Wright’s Law. For example, recent research on the impact of World War II on the demand for military products indicates that the exogenous stimulation of demand (such as a war or a climate crisis) can drive down costs resulting from increasing cumulative production (i.e. learning by doing).
Figure 1: Historical PV cost forecasts and floor costs. The blue dots show the observed global average levelized cost of electricity (LCOE) over time. Red lines are LCOE projections reported by the International Energy Agency (IEA),orange lines are integrated assessment model (IAM) LCOE projections reported in 2014 and yellow lines are IAM projections reported in 2018.
The most important question is whether it is feasible for renewables (largely solar and wind) to reach the >55% supply of global electricity generation by 2030 (and 100% by 2050) consistent with a net zero scenario. A study in Nature Energy suggested that in countries where solar growth has stabilised at a maximum rate, its annual share growth of the total electricity supply has increased at 0.6ppts per annum – well below the 1.4ppts needed under a 1.5°C scenario. The question is primarily one of timing rather than capacity, as a recent study indicated that solar and wind potential energy is already as much as 100x global energy demand. We remain optimistic that future innovation will continue to drive down the cost of electricity, although storage remains a big
hurdle to a fully-decarbonised grid (see below).
Storage
Due to the intermittent nature of both solar and wind power, it is vital that energy storage solutions are able to keep pace with the development and deployment of renewable energy generation technologies. The two most significant areas of technology development are batteries and hydrogen. Policy support looks increasingly robust with specific provision for energy storage including standalone storage ITCs in the US, the EU’s Green Deal and China’s 14th 5-year plan.
“Almost 50% of the emissions reductions needed in 2050 in the NZE depend on technologies that are at the prototype or demonstration stage”, including 30% of the cumulative emission reductions from using low-emission electricity, 75% from the use of hydrogen, 55% from the use of Carbon Capture, Utilization and storage (CCUS), and 45% from bioenergy. A huge amount of innovation is required to make net zero remotely feasible.
The most encouraging news for both the planet and the sector is innovation timelines for early stage clean energy technologies are running at faster rates than has been seen historically. Time from first prototype to market introduction is 20% faster than the fastest energy technology developments in the past. This reflects the increasing urgency of the threat from climate change, deeper capital markets and enhanced government support.
Technological Innovation
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The Trust’s enhanced integration of ESG risks and opportunities into its investment process reflects the increasing importance of environmental issues
– see ESG section. Climate change will have an impact on every company in the portfolio just as economic change will. A recent consumer survey found 80% of 18-34 year olds view sustainability as somewhat or very important to their purchasing decisions, and given Gen Z and Millennials will make up 70% of consumers by 2028, so companies must have a strategy to reflect (and take advantage of) these changing consumer preferences.
We will need to understand how companies are adapting their business models in light of climate change, and how they plan to navigate the second-order effects of the transition to net zero as the intensity of regulation, investment and other activity increases. The Trust itself will also have to demonstrate its continued relevance to younger shareholders, showing the value of a publicly-traded, permanent capital vehicle to provide broad exposure to the technology space in a sustainable manner. We hope our early ESG efforts will provide a solid foundation on which to build.
Investment implications
for the Trust
Semiconductors' increasing prevalence and efficiency
Technology and the climate challenge: what will happen?
The risks associated with addressing the climate challenge
Semiconductors are uniquely positioned as the underlying technology underpinning increasing energy efficiency, automation, EV adoption and the expansion of renewable energy. A recent Goldman Sachs study indicated semiconductors can enable avoidance of 5x more emissions than they emit. Lighting is a prosaic but significant example as in 2015 US DOE found lighting industry consumed up to 15% of global power (3,370TWh), which has declined to approximately 12% of global power (2,800TWh) since then via LED adoption. LEDs use at least 75% less energy and can last up to 25x longer than incandescent lighting.
In the PC market, a longstanding active position Trust’s, AMD, has achieved 31.7x energy efficiency gains between 2014 and 2020, and – combined with improvements in the power efficiency of memory chips alone has meant the power consumption of PCs being 4-22% lower than it otherwise would have been.AMD has committed to a further 30 increase in energy efficiency for AMD processors and accelerators powering servers for artificial intelligence training and highperformance computing (2020-2025).
Silicon carbide-based power semiconductors can run with 70-90% less energy loss compared to silicon-based chips, for example allowing longer ranges (+20%) and faster charging (>50%) for EVs. The silicon carbide market is estimated to grow at a c.54% CAGR 2021-24, to reach $5bn as these applications ramp up. Other power semiconductors such as IGBTs and MOSFETs are expected to see greater density as safe power management is an integral part of a decarbonizing economy (as larger batteries and higher voltages become common in more products), potentially reaching a $25bn market by 2025 from $9bn in 2017.
Semiconductors' increasing prevalence and efficiency
The IPCC’s latest Assessment Report finds a >50% likelihood that global warming will reach or exceed 1.5°C in the near-term (2021-2040), and a recent report from the World Meteorological Organization and the UK Met Office suggested there is a 48% chance the world reaches 1.5°C in the next five years, so the odds of achieving a net zero scenario within a time frame that keeps 1.5°C in play are against. COP26 pledges (if fully implemented and achieved) would see the planet warm by 1.8°C, a significant improvement on the 2.1°C the IEA forecast before the summit.
The forecast temperature increases to 2.4°C when counting only the 2030 targets, which only cover a 17% cut to emissions versus the 50% required by this date. Given the ‘race to net zero’ is as much a policy and lobbying tool as a prescribed path of action, to fail to meet net zero targets brings heightened risks but not guaranteed devastation.
It is sometimes missed in the noise of climate activism and the need to push for further progress, but material progress has already been made. As Frances Moore, assistant professor at the University of California, put it regarding the global temperature increase: “Even 10 years ago, we would not have ruled out a 4°C or 5°C world, which is very different than a 2°C or 3°C world.”
Technology and the climate challenge: what will happen?
The risks associated with addressing the climate challenge
Combating climate change is an existential necessity, but brings with it a wide array of risks which are not yet fully understood. Even the emergence of abundant, cheap renewable power is not an unalloyed good (see Jevons’ Paradox below). Second-order effects are likely to be meaningful, and climate policy is increasingly being subsumed into other policy areas in a way that can lead to unintended consequences and feedback loops.
Debt
The net zero transition will be very expensive. Given the regressive nature of carbon taxation (either directly via a carbon tax or indirectly via regulation), governments are likely to come under pressure to provide support to lower income households, in addition to the material public capital investment and private incentives required to finance the transition to net zero (renewable energy, transmission infrastructure, heating and buildings retrofits etc). Likewise, the burdens of carbon taxation will fall most heavily on those with carbon-intensive lifestyles – those who live in the suburbs rather than urban areas. The gilets jaunes are unlikely to be the last to make their voices heard protesting against carbon taxes, and the European Commission’s Emissions Trading Scheme (ETS) proposes 25% of resources from it are allocated to a dedicated Social Climate Fund.
There are also geopolitical headwinds to meeting the climate challenge which manifest themselves more acutely at times of stress. Soaring oil and gas prices will put upwards pressure on inflation and reduce the political will to limit fossil fuel exploitation. Energy has always been a highly politicised resource given its scarcity and importance, and a wider popular pushback against decarbonisation initiatives linked to concerns about inflation and the cost of living is likely.
On the other side, Russia’s actions in Ukraine have highlighted the necessity of energy independence and the need for a faster transition to a renewables-based system. Robert Hableck, Germany’s economic minister from the Green Party, is reviewing the possibility of keeping both coal and nuclear plants online to reduce dependence on Russian energy – an extraordinary volte-face given the Greens’ pro-environment, anti-nuclear pacifist roots. It seems entirely possible that the desire for energy independence – or at least reduced energy dependence – could lead countries to invest in both near-term GHGemitting relief measures (such as consumer energy bill subsidies) and a structural increase in renewable power simultaneously.
Jobs
McKinsey estimates the net zero transition could result in a gain of about 200m and a loss of about 185m jobs globally by 2050, although the impact of both losses and gains will not be shared evenly. ‘Wind turbine service technicians’ and ‘Solar photovoltaic installers’ are expected to be in the top 5 fastest-growing US occupations over the next decade, according to Bureau for Labour Statistics. The nature of some green subsidies skew them to the already affluent, as a 2016 US study found 60% of $18bn worth of income tax credits for weatherising homes, installing solar panels, buying EVs and other clean energy investments went to the top income quintile. The IEA argues global employment will be boosted in the energy sector in a net zero pathway scenario, with 14m jobs created directly by clean energy investments by 2030 versus 5m lost in the fossil fuel sector.
Inflation
Some research has characterised decarbonisation as “putting a price on a resource that used to be free”, and is thus best analysed as an adverse supply shock, along the lines of the oil shocks of the 1970s, “when a previously underpriced resource was suddenly revalued”.
Goldman Sachs estimates the transition path to net zero (expressed via linear increases in a carbon tax to $100/ton by 2030) would boost US headline PCE by 25bps annually, and about 10bps to core PCE inflation. The boost to inflation would be more meaningful the longer the transition is delayed, with a 10 year delay to start the transition resulting in carbon and energy prices 35% higher in 2050 than under the immediate transition scenario. A NIESR study suggested a sudden rise of $100 per tonne in a carbon tax applied across all economics would act as a fiscal tightening equivalent to 1-2% of GDP in most OECD countries and increase inflation by more than this.
The Federal Reserve set up two committees in March 2021 to examine risk that climate change poses to the broader financial system, but Chair Powell has since suggested climate change “is not something we directly consider in setting monetary policy”.The Fed will, however, provide supervisory guidance on climate change to help banks mitigate their exposure and develop scenario analysis, in line with other G7 central banks. The further politicisation of central bank policy with respect to climate change in addition to nearer-term economic conditions such as inflation and the labour market brings incremental complexity and risk to monetary policy considerations.
Interest rates
Interest rates are likely to see upward pressure given the effect of higher levels of investment needed to tackle risks from climate change. The transition to net zero is supportive of the argument that inflation and policy rates will settle above pre-pandemic levels, but it is notable that the impact looks broadly containable. A 2021 empirical study looking at the European and Canadian experience found “carbon taxes do not have to be inflationary and may even have deflationary effects”.
The net zero transition does not necessarily have negative implications for economic growth as the EU’s modelling on its climate plan assumes a -0.7% to +0.55% impact on GDP. The Bank of England’s work shows only moderate impact of climate policies on aggregate GDP in the Early Action scenario, which sees UK GDP growth dip temporarily to 1.4% between 2026-30, before recovering to 1.6%.
All projections should be treated very cautiously, as the BoE’s own research admits “expertise in modelling climate-related risks is in its infancy”. It is, however, highly likely that the composition of incremental growth will shift away from consumption in favour of investment. The IEA’s modelling suggests within the energy sector alone, global investments in energy would need to jump from 2.5% of global GDP 2016-20 to 4.5% by 2030, and the European Commission estimates an increase in the investment-to-GDP ratio by 1.5-1.8ppts to peak at 3% in 2030 (from 1% In 2010). All else equal, this would take the world investment ratio back above its 1980-89 level of 25.7%, from 24.3% 2010-19.
It is possible these investments will drive higher trend GDP growth via stimulating aggregate demand nearterm or productivity growth in the medium-term, but a more likely impact (to at least some degree) is a curtailment in the growth of consumption. The comparison with wartime investments is illuminating – resources are rapidly diverted to fund aggressive investment in something to protect people in the long run and can bring with it a meaningful increase in innovation, but near term consumption is pressured.
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The Trust’s enhanced integration of ESG risks and opportunities into its investment process reflects the increasing importance of environmental issues…We hope our early ESG efforts will provide a solid foundation on which to build.
Technological Innovation
Digital technology’s role in tackling the climate challenge is more comprehensive than many believe. Industry studies have indicated that the ambitious application of digital technology could help deliver one-third of the emissions reductions required by 2030 for a pathway to an outcome well below 2 degrees. We consider three structural trends that we believe will play a pivotal role in the technology sector’s contribution to addressing the climate challenge which indicate the Trust’s alignment with this vital task: the ongoing move to the cloud, the rise of AI and ML, and the increasing importance of semiconductors in the world.
The technology sector itself emits somewhere between 1.8% and 3.9% of annual GHG emissions, depending on where the boundaries are drawn and how supply chain and lifecycle impact are accounted for. Megacap tech rightly comes under close scrutiny, but has shown leadership in this area: Microsoft plans to be carbon negative by 2030, Apple uses 100% renewable energy and will be 100% carbon neutral for its supply chain by 2030, Google became carbon neutral in 2007 and will be carbon free by 2030. Even Amazon has pledged carbon neutrality by 2040 and to use renewables to power its operations by 2025.
Accenture found IaaS migrations can reduce carbon
emissions by more than 84% and energy usage by 65% compared with conventional infrastructure. AWS infrastructure is 3.6x more energy efficient that the median US enterprise datacentre, mainly due to more efficient servers and higher utilisation rates. Microsoft found a 10,000 user study indicated a 93% carbon emission reduction from energy savings and Microsoft’s renewable electricity purchases. More importantly, despite concerns about the growing energy draw from hyperscale data centres, recent IEA research suggests the energy demand from data centres has barely increased during the past decade (200-250TWh or about 1% of global energy) even as traffic has grown at a 30% CAGR (15x).
However, data centres can still represent huge electricity demand loads and put pressure on electricity grids, especially in smaller or less developed countries. It is also worth noting that taking bitcoin mining activities into account would result in a c.50-75% increase to the global data centre power demand.
Technology is critical to enabling successful adaptation, especially over a compressed time frame. Artificial Intelligence (AI) and Machine Learning (ML) can help reduce GHG emissions and help society adapt to a
changing climate just as mRNA-based vaccines proved pivotal in tackling the threat from covid. The landscape of issues to which ML and AI technologies can be applied is vast. This includes the dynamic forecasting and solving of supply/demand/capacity optimization problems in the energy network, accelerating materials science discovery, fusion science, reducing current system impacts, driving efficiencies in transport networks, optimizing buildings and countless other applications. A study found AI alone could save up to 4% of GHG emissions by 2030 and create 18m-38m net new jobs globally driven by optimized use of inputs, higher output productivity and automation of manual and routine tasks.
One of the most significant impacts in the near term is AI is in better predicting and analyzing which near term energy efficiency measures actually work; for example, actual building emissions are around 2-3x predicted levels. The ability to use AI to optimize the design and operation of complex adaptive systems including cities, transport and logistics networks and even entire ecosystems provides an enormous opportunity to understand better and solve for the decarbonisation of those systems. The Trust owns a number of companies supplying critical technology to enable such AI-led improvement, including chipmakers AMD and NVIDIA, DRAM manufacturer Micron, HDD supplier Seagate, and their cloud company customers who will ultimately host most of the AI and ML-focused workloads.
AI may also be well-placed to accelerate practical nuclear fusion, a more controversial but potentially
highly impactful part of the future clean energy mix. DeepMind (part of Alphabet) published a recent paper in which they demonstrated the potential for deep reinforcement learning to control plasma in a tokamak, which some believe is fundamental to successful nuclear fusion.
This example also points to another structural advantage AI can bring to speed up innovation and increase the likelihood of success – synthetic data. DeepMind’s model was trained on a simulated environment before being applied to a real example (much more expensive). Given the cost and difficulty of acquired the massive datasets needed to address climate change, simulated environments and synthetic data are likely to play a key role in future innovation and understanding. We have provided a collection of graphics to give a sense of the potential scope of AI’s impact.
The role of digital technology, software, data and innovation
The move to the cloud helps reduce
carbon emissions
The rise of Artificial Intelligence and Machine Learning
Important information: The information provided is not a financial promotion and does not constitute an offer or solicitation of an offer to make an investment into any fund or company managed by Polar Capital. It is not designed to contain information material to an investor’s decision to invest in Polar Capital Technology Trust plc, an Alternative Investment Fund under the Alternative Investment Fund Managers Directive 2011/61/EU (“AIFMD”) managed by Polar Capital LLP the appointed Alternative Investment Manager. Polar Capital is not rendering legal or accounting advice through this material; viewers should contact their legal and accounting professionals for such information. All opinions and estimates in this report constitute the best judgement of Polar Capital as of the date hereof, but are subject to change without notice, and do not necessarily represent the views of Polar Capital. It should not be assumed that recommendations made in future will be profitable or will equal performance of the securities in this document. Polar Capital LLP is a limited liability partnership number OC314700. It is authorised and regulated by the UK Financial Conduct Authority (“FCA”) and is registered as an investment advisor with the US Securities & Exchange Commission (“SEC”). A list of members is open to inspection at the registered office, 16 Palace Street, London, SW1E 5JD.
Important information: The information provided is not a financial promotion and does not constitute an offer or solicitation of an offer to make an investment into any fund or company managed by Polar Capital. It is not designed to contain information material to an investor’s decision to invest in Polar Capital Technology Trust plc, an Alternative Investment Fund under the Alternative Investment Fund Managers Directive 2011/61/EU (“AIFMD”) managed by Polar Capital LLP the appointed Alternative Investment Manager. Polar Capital is not rendering legal or accounting advice through this material; viewers should contact their legal and accounting professionals for such information. All opinions and estimates in this report constitute the best judgement of Polar Capital as of the date hereof, but are subject to change without notice, and do not necessarily represent the views of Polar Capital. It should not be assumed that recommendations made in future will be profitable or will equal performance of the securities in this document. Polar Capital LLP is a limited liability partnership number OC314700. It is authorised and regulated by the UK Financial Conduct Authority (“FCA”) and is registered as an investment advisor with the US Securities & Exchange Commission (“SEC”). A list of members is open to inspection at the registered office, 16 Palace Street, London, SW1E 5JD.