Ingenuity and opportunity: Navigating the path to net zero

When it comes to climate change and the transition to net zero, there are two contrasting dynamics at play. The science is pretty grim – we are approaching the point where it looks like the world may have overshot the 1.5 degrees Centigrade (˚C) global warming target¹ , and there is more and more evidence of extreme weather events.

On the other hand, there is an abundance of evolving ingenuity which is helping pave the way to net zero - exponential growth in solutions such as renewable energy and electric vehicles (EVs) but also in areas like industrial heat and alternative proteins. It is a race between human and market ingenuity and the damage which has already occurred.

This November’s United Nations climate change conference COP29 in Baku, Azerbaijan, will be an important milestone even if it is unlikely to have the impact of Glasgow’s COP26 or COP28 in Dubai. We are increasingly in problem-solving mode: the recent New York Climate Week was less about targets and more about plans, with people rolling their sleeves up and talking about how we reach those targets.

COP29 will see the beginning of countries publishing the next round of Nationally Determined Contributions – 2035 commitments setting out how they will contribute to the goal of limiting global warming to below 1.5˚C above pre-industrial levels.  

A new financing regime will also be negotiated in Baku - the New Collective Quantified Goal.

This will build on the 2009 agreement for developed countries to collectively mobilise $100bn in public finance a year for developing countries to tackle climate change – but hopefully will acknowledge that domestic capital mobilisation and private finance are just as important, reflecting the report commissioned for COP27, in 2022, which found that $2.4trn of annual investment will be needed by 2030 in emerging and developing economies.²

Focusing on the $100bn figure has held us back – there is a need to mobilise private finance and domestic capital as well as the public sector. I think there will also be more focus on the real economy, with opportunities for problem solving, where industry and finance ministers are involved as well.

From targets to plans

We have already seen some policymakers move from targets to plans and some have done this better than others. California is a good example – the fifth largest economy in the world, it has punchy net zero targets and policies including for the automotive sector. Meanwhile in Denmark, business and industry are working together with the government to keep reviewing net zero plans.

In the UK there has been record funding for renewable energy³  and good plans on power and transport, with attention turning to industry, residential buildings, land and food – areas where there is less policy clarity and more innovation is needed. The new government has hit the ground running, following the advice of the Climate Change Committee to reinstate some of the policies reversed by the previous government and increasing the capital available to the National Wealth Fund (formerly UK Infrastructure Bank) to invest in the net zero transition.

The US election creates some uncertainty for net zero policies in the world’s largest economy. However, in his previous presidency, Donald Trump pledged to revive the US coal industry - but coal plant retirement happened faster under Trump than it had under Barack Obama.⁴

If re-elected, Trump could try to roll back the transition to EVs but that could potentially hurt the US car industry, given the amount of investment that has gone into the sector. More concerning is the impact of possible tariff wars on consumers and global growth, which could slow down the whole global transition to net zero.

Elsewhere, some emerging market countries are thinking about industrial competitiveness as part of the transition. This is a switch policymakers need to make - if you don’t drive it as an industrial transition you tilt towards importing solutions from other countries and losing market share. China took this approach some 15 years ago, for example in EVs, and the rest of world is trying to catch up, but probably never will. The lessons of the oil crisis in the 1970s where US automakers responded too late to the market need for more efficient cars and lost market share have clearly been forgotten!

The opportunity of the transition

Overall, we are making progress on the transition to net zero. Don’t listen to the headlines that tell you things are slowing down, and that net zero commitments are on the wane; look at the facts that show things are speeding up. For example, the International Energy Agency (IEA) recently said global renewable energy capacity is expected to grow by 2.7 times by 2030⁵ . That falls short of the COP28 goal of tripling the world's capacity in that timeframe - but in my view the IEA's estimate could be conservative and I believe the tripling the goal is well within reach. 

If you consider the exponential growth of technology after technology, then the past is not always a good guide to the future, particularly in a time of disruption.  The fact that it has taken 20 years to reach 20% EV market share for example, does not mean that it will take another 20 years to reach 40%. In fact a smart exponential projection shows that the combustion engine is essentially a museum technology by 2035!

A lot of the decarbonisation of heavy industry, for example, will come from disruptors – providers of new products and solutions that will overtake the incumbents. For example, five years ago there was broad consensus that green hydrogen would be the solution to decarbonising high temperature heating processes in industry, but now it looks like thermo-electric solutions will prevail. There will likely be a global reallocation of capital to some of the growth areas, highlighting the rising opportunities for those who understand their exponential maths and seek out the problem solvers who are driving the transition.

Nigel Topping is an external advisory member of the AXA IM Investment Institute.

The views and opinions expressed in this article are those of the author and do not necessarily reflect those of AXA Investment Managers.