How the economy can become climate neutral

How the economy can become climate neutral

October 20, 2021

Time to act! COP26 is our chance to get specific about climate protection and to grasp the opportunities for growth.

"The key task for policymakers today is to wisely steer the industrial society through the most dramatic transformation of its 200-year history."

Stefan Schaible

The fight against global warming has found its way into numerous international agreements and national laws in recent years. In the 2015 Paris Agreement, the international community set itself the goal of limiting global warming to well below 2°C, ideally 1.5°C.

Since Joe Biden's election as U.S. President, it should be clear to everyone, if it wasn't before, that sustainability and the concept of taking consistent steps to protect the climate are not just the latest fads, they are topics that are not going anywhere soon. Just this summer, the EU set itself the goal of achieving climate neutrality by 2050 and of bringing greenhouse gas emissions down to at least 55% below 1990 levels by 2030.

Stefan Schaible, Global Managing Partner at Roland Berger
Stefan Schaible, Global Managing Partner at Roland Berger

Five years on from COP21 in Paris, it is now time for COP26 in Glasgow. Fighting climate change is no longer a question of if, it is a question of how. The time for talking about abstract targets has passed – it is time to demonstrate concrete ways of achieving the agreed climate goals. This will require cooperation between business leaders and policymakers and between nations and the international community.

The task of the century – transforming the traditional industrial society towards a future powered by renewable energies

The key task for policymakers today – at international, national and local level – is to wisely steer and guide the industrial society through the most dramatic transformation of its 200-year history. We are talking about nothing less than completely transforming the energy basis of our industrial society within a generation, a good 30 years – away from coal, oil and natural gas and towards renewable energies.

We are all in the same boat – the whole of humanity. Optimizing climate footprints nationally can only help if we achieve an overall reduction of carbon emissions on a global scale. Climate change is a battle we will only win if we attack on multiple fronts. Many individual nations going it alone and optimizing their national climate footprints will simply not be enough.

Decarbonization is an opportunity for the economy: Roland Berger's new competitiveness paradigm

The challenge of climate change is something we can only master if businesses see decarbonization not as a threat but as a huge new opportunity for growth. All sectors, all companies and all regions will be able to benefit. The opportunity to conquer new markets will be open to innovation leaders across the length and breadth of the economy – whether in electric mobility, in the production and transportation of renewable energies, in many service sectors, or in the financial sector in the form of sustainable investing.

Recognizing the need for decarbonization is the foundation of a new way of looking at competitiveness. Traditionally, firms carved out a competitive edge for themselves by leading on either quality or price. Competitiveness was based on factors such as a superior cost structure or a unique product or innovation. In the new competitiveness paradigm developed by Roland Berger, whether a company is competitive or not depends fundamentally on its own action or inaction with regard to climate issues.

Put simply, the sooner companies align themselves with the new competitiveness paradigm, the sooner they will be able to exploit the potential of the new currency – carbon emissions – which will then be reflected in price and quality.

Converting the energy industry to run on a sustainable basis is a Herculean task for industry and government

Being climate neutral by 2050 entails fundamental change in the way we do business and the way we live in society. Our entire energy system must be radically transformed over the next three decades as a core element of this change. Production processes and services will have to cover their energy needs from renewable sources. Our own mobility and the way we heat our buildings, too, will have to be converted to harness renewable sources of energy. This sector coupling means that almost all processes that were once based on fossil fuels will need to be powered by electricity from renewable energy sources or climate-neutral hydrogen in the future.

At the same time, we must be clear that we need to think long term if we want to be climate neutral by 2050. Importantly, what global climate neutrality in 2050 means is that the global demand for climate-neutral electricity will have risen from 78 EJ in 2020 to 169 EJ in 2050, according to figures from the International Energy Agency (IEA). And even larger increases cannot be ruled out. In other words, in 30 years we will need more than twice the electricity we currently use – and this electricity must be produced using climate-neutral methods.

This being the case, work on promoting and expanding renewable energies must be given top priority. One of the most important basic requirements for achieving climate neutrality is the expansion of renewable electricity generation and the power grid. Approval processes and feed-in regulations will need to be radically simplified. Financial incentives from the public sector must be set in a way that truly enables private investment to be unleashed on a massive scale.

For industrial processes that lack any climate-neutral technologies to power them now or in the foreseeable future, their CO2 emissions will need to be prevented from reaching the atmosphere through CCU or CCS, or at least by operating within a circular economy to reduce the amount of carbon emitted.

Businesses can shape climate change in a positive direction and they are willing to invest on a massive scale. But they need the right framework

These tasks can only be successfully mastered if there is sufficient investment - from politics and business. Achieving climate neutrality will take an investment wave – a real wave of private sector investment in climate-neutral industrial plant and systems. For this to work, there needs to be a transparent and reliable political framework in place, along with incentives in the form of Contracts for Difference to offset the added costs of climate-neutral technologies.

Corporate investment must be flanked by a wave of public investment that creates the necessary infrastructure for climate-neutral business to take place and finances the basic research that will be needed – such as in the field of carbon capture and storage.

The 21st century megatrends: Digitalization and decarbonization stake out a framework that offers certainty and, after Glasgow, hopefully enables businesses to plan

We are always hearing that the future is more uncertain than ever. And there is some truth in that, with investment plans and business strategies having ever shorter half-lives and companies having to plan and make decisions under both considerable pressure and great uncertainty.

On the other hand, companies can rely on two decisive trends undoubtedly shaping the decades to come: digitalization and decarbonization. Businesses now need to find the right ways to respond to those two trends. That will take new ideas, new business models and, in many cases, technological innovations across all sectors of the economy. To achieve this, companies need a reliable and predictable framework within which they can make plans.

So, when COP26 begins in Glasgow in a few days' time, the aim must be, in a dialogue between policymakers and business leaders, to lay down the rules by which we will all need to play over the coming years. These rules must come into force without undue delay and offer a reliability and pace of transformation that can unleash the market forces without which the Paris climate targets will remain elusive. Crucially, the transformation can succeed. As long as we act now and create the right framework to deliver it.

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Further readings
Portrait of Stefan Schaible
Senior Partner, Global Managing Partner
Frankfurt Office, Central Europe