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Targeting zero carbon emissions
Article published in Allnews, 14 August 2020
What impact are the Paris Agreement's targets having on our economic model?
The climate change transition is already underway. It's not a slow evolution towards a sustainable model; it’s a revolution. We estimate that CO2 emissions could fall by between 4% and 8% in 2020 and road transport emissions by 14% as a result of the travel restrictions imposed due to the COVID-19 pandemic. But to meet the Paris Agreement's targets of limiting temperature increases to 1.5ºC, total greenhouse gas emissions need to decrease by 7.6% annually between now and 2030, and transport-related emissions need to be almost halved by 2050. To achieve this, we have to decouple growth in emissions from the rising demand for mobility of people and goods, which will be vital for future economic growth.
Why is targeting carbon neutrality so important for investors?
This transition is fed by a strong feedback loop; as technology becomes less expensive and investors and consumers actively encourage companies to get involved. This in turn is speeding up regulations. From an investor's perspective, companies that react more quickly to the transition will be better positioned and able to thrive, and those able to provide more sustainable mobility services will benefit.
How are certain cities rethinking urban mobility?
Some cities are completely rethinking mobility models for residents, public transport systems, multiple modes of shared transport and micromobility. These cities are working on a CLIC™ (circular, lean, inclusive, clean) transport system, as opposed to the current WILD (wasteful, idle, lopsided, dirty) model. This new model is already being used in major cities such as London, Barcelona and Paris to combat congestion and air pollution and to encourage smaller (electric scooters, e-bikes) yet more active modes of transport by promoting soft mobility.
COVID-19 has also changed how people perceive transport. What will the long-term impact be?
Although certain habits are returning to normal, COVID-19 should bring about changes, such as an increase in remote working. Through the crisis, the world discovered that technology enables better connectivity. Consumers who are rethinking their transportation modes are also discovering the quality of electric vehicles and mixed-mode transport, which may dissuade them from going back to their old habits. Governments will also issue new regulations to encourage populations to adopt these new modes of transport.
You believe that third-party forecasts underestimate the penetration rate of electric vehicles. Why?
It's a question of the technology costs. As soon as the costs of batteries and production allow car manufacturers to make electric vehicles as profitably as internal combustion engines, we can expect exponential sales growth. On the consumer side, the overall lower cost of electric vehicles should prevail over their decision to buy. Some countries such as Germany already offer tax deductions if you buy an electric vehicle. It's not only vehicle manufacturers like Volkswagen who will benefit from electrification, but also companies along the supply chain for electric batteries and those who make semiconductors.
Are self-driving vehicles still science fiction, or could they be available soon?
We are still some way off from a perfect self-driving system. Cybersecurity and the regulatory environment are still the main obstacles, but we can expect improvements. There's a lot of talk about driverless taxis, but in the short term, we're more likely to see semi-autonomous vehicles – particularly lorries – on the motorways. Incidentally, we're already seeing highly autonomous test drives in the US and Singapore.
Are some companies already in line to be frontrunners in this area?
It's still too early to determine the winners and losers among the car manufacturers. However, there have been a lot of investments in self-driving and a slew of M&A (Mergers and Acquisitions) deals in the industry.
Although it's more difficult to cut carbon emissions in sectors such as transport and electricity production, these two areas remain vital to economic growth. How do companies which are dominating the race for decarbonisation increase their profits?
It's essential to focus investments not only on suppliers of low carbon intensity solutions, but also on high carbon intensity sectors that are vital to economic growth but need to find solutions to ensure the transition towards the target of a carbon-neutral economy. The companies that achieve this the fastest will be the best placed to gain market share.
For example, car manufacturer Volkswagen, which is in the process of increasing the penetration of electric vehicles, will benefit from economies of scale on its electric platforms and could gain a considerable share of the electric vehicles market compared to its competitors, who are evolving more slowly. Similarly, a company such as Cummins, which is investing in future powertrains for commercial vehicles, notably hydrogen fuel cells and electrified powertrains, could gain commercial market share due to the lower costs of a fleet of electrified vehicles. Orsted is an example of an energy company whose share price has benefited from its transition from a traditional oil and gas company to a carbon-neutral energy supplier.
Important information
This document is issued by Bank Lombard Odier & Co Ltd or an entity of the Group (hereinafter “Lombard Odier”). It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document. This document was not prepared by the Financial Research Department of Lombard Odier.
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