February 21, 2024 • 45 mins
The Inflation Reduction Act is an import signal that the United States is putting out to the world that is leading to real investments, yet its potential will soon come up against some very real roadblocks, says Aniket Shah, Managing Director at Jefferies. In this episode of Bloomberg Intelligence’s ESG Currents podcast, Shah discusses these threats to the energy transition and decarbonization with Chris Ratti, Bloomberg Intelligence’s Senior ESG Credit Analyst. They also talk about the future of green financing instruments.
This episode was recorded on January 10.
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Episode Transcript
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Speaker 1 (00:09):
ESG has become established as a key business theme as
companies and investors seek to navigate the climate crisis, energy transition,
social mega trends, mounting regulatory attention, and pressures from other stakeholders.
The rapidly evolving landscape has become innundated with acronyms, buzzwords,
and lingo, and we aim to break these down with
(00:29):
industry experts. Welcome to ESG Currents, brought to you by
Bloomberg Intelligence, your guide to navigating the involving ESG space,
one topic at a time. I'm Chris Rawdy, Senior ESG
credit analyst and your host for today's episode. Today we're
talking with anaquet Shaw, Managing director and global head of
(00:50):
Sustainability and Transition Strategy at Jeffreys. Welcome, Annicut, Thanks so much.
Speaker 2 (00:56):
It's great to be here.
Speaker 1 (00:57):
You know, I'm hoping to discuss kind of where we
are in energy transition, where we're headed, what investors are facing,
maybe short to medium trends you're seeing or expecting, but
I'd really like to jump right in with the US
because we're facing a lot of paradoxes. You know, fossil
(01:17):
fuels still eighty percent of energy basically, But there's been
a ton of investment recently, and the body and administration
has claimed to be focused on and willing to spend
on the issues. You know, the IRA was passed, but
do you think we're going to see meaningful results? And
what are some of the other plans or proposals you
see coming.
Speaker 3 (01:38):
Well, it's great to be here, and that's a great
place to get started. One of the positive surprises for
the energy transition crowd over the last couple of years
has been the Inflation Reduction Act. If you'll recall a
couple of years ago, everyone thought that that bill was
dead and that there was going to be no significant,
(01:59):
major public investment from the Biden administration on the energy transition.
And then out of nowhere came this compromise bill, which
initially the experts had put as a three hundred to
four hundred billion dollar spending program, and now some estimates
have said that that could be upwards of one to
two trillion dollars of investment in energy transition, mostly through
(02:22):
tax credits. So the key question is how significant is
it and can these actually can these tax credits potentially
persist in a election year because of course twenty twenty
four is a major election year here in the United
States and all around the world. My view about the
Inflation Reduction Act is that it is an important signal
(02:47):
that the United States is putting out to the world
that is leading to real investments. However, Chris, we are
soon going to hit up against some very real roadblocks,
and these roadblocks, if not addressed, we'll actually slow down
and negate the potential positive impact of the IRA when
it comes to energy transition and decarbonization. By far, the
(03:11):
single biggest roadblock when it comes to the buildout of
renewables in this country is the grid. And we at
Jeffrey's have been writing about the grid now for well
over a year, helping our clients understand if we don't
solve for the problems of the interconnection cues, where there
are now literally thousands of gigawatts of projects renewable projects
(03:37):
that are waiting in the interconnection cues, if we don't
solve that issue, and it's a policy issue, a lot
of these projects are going to die on the vine.
And although we are starting to see some movement from FIRK,
I'm not very optimistic about that. I'm also not very
optimistic about permitting reform to the scale of what's required
(03:57):
for some of these grid projects to be built in
time for the energy transition. The second roadblock that the
United States is going to come up against is the
worker worker shortages when it comes to building out renewables.
Speaker 2 (04:11):
It's not a.
Speaker 3 (04:12):
Very sexy topic, but estimates are anywhere between We're short
between half a million and a million electricians that are
required to do all of the solar installation and the
hvacs and so on. You can't do that overnight. You
need a real system, and you need a real plan,
and I don't see that happening either. And then the
(04:34):
third roadblock that we see, which is a significant one,
is trade tensions with China. The idea that the US
can build the manufacturing capacity to do all of this
internally is a joke and it's not going to happen.
And so again, the IRA is significant. Real investments have
been made on the back of it. But these roadblocks,
(04:56):
these real structural roadblocks, need to be assessed and need
to be overcome in order for the IRA to have
its impact. And I'm not seeing those being solved anywhere
close to what's needed, right.
Speaker 1 (05:08):
I mean, you kind of pointed to one of the
major roadblock being you know, permanitting and some of the
regulations that we're seeing. I mean, obviously there's in the US,
there's been some anti ESG movement that we've seen, and
that's obviously a growing risk as we see states contradict
federal so like the SEC climate disclosure requirements are coming
(05:32):
to mind where states are threatening litigation permitting is obviously
an issue. In California recently, you know, they changed some rules,
so solar companies are going out of business because they
can't get as much solar done. What are your thoughts
on some of the potential opposition that we're seeing and
the misalignments maybe between state and federal.
Speaker 3 (05:54):
The ESG backlash in the United States has been a
vociferous and very over the last couple of years. I
think even for those of us who are quite you know,
quite clearheaded when it comes to the analytics of US politics,
we were caught a little bit by surprise by the
(06:16):
scale of the backlash. And what's important to note about
the ESG backlash is that so much of it, Chris,
in my opinion, comes from a lack of clear definitions
of what this project is all about and what the
goal of this project is all about. So when we
talk about ESG investing in the capital markets, to us
(06:40):
at Jeffreys, ESG is not about solving environmental, social, and
governance problems. It's about better analyzing those issues, these externalities,
these intangibles in order for an investor to make a
better investment decision. For others, the ESG movement is about
(07:01):
solving climate change, it's about solving social disparities and so
on and so forth. And frankly speaking, Chris, I think
the investment industry was playing fast and loose with how
they were using the term, and they got caught out,
and they got caught out quite real and now that's
created a whole host of problems for the largest.
Speaker 2 (07:22):
Investment managers in the world.
Speaker 3 (07:23):
So that's the first point I would say, is that
there wasn't very clear articulation about what ESG means and
that has led to a lot of this. The second
point is around the energy transition and about yea.
Speaker 1 (07:35):
Why a lot of a managers stopped using ESG as
they're that's a buzzword, right, They've pulled way back from
ESG as a buzzword maybe still using sustainability or sustainable practices,
but ESG has kind of been quietly not talked about
as much.
Speaker 3 (07:52):
Absolutely, we've taken it out of our titles because it
was just creating a really negative real action, whereas the
work that we do is pretty standard and non offensive.
And so, yes, the term has certainly been vilified now,
and I don't think we're going to be hearing a
(08:12):
lot of ESG in the United States in the years
to come when it comes to the energy transition. I
think it's important for folks to always remember that the
United States is a fossil fuel superpower. You know, we
have such a large and dynamic economy here in the
(08:32):
United States.
Speaker 2 (08:33):
People offer the oh, the US is.
Speaker 3 (08:34):
A financial hub of the world, which it is, or
United States is a technology hub of the world, which
it is. But the US is also an oil and
gas superpower. And so it's only it's only predictable that
we are going to see a response from the fossil
fuel industry through political means when it comes to the
(08:56):
pace of the energy transition. Now, let's talk about this
in in the real policy and politics of it all.
As you know very well, Chris Over sixty. In some estimates,
over eighty percent of the Inflation Reduction Act investments have
(09:17):
gone to Republican states and Republican congressional districts. So the
biggest beneficiaries of the IRA investments in solar and wind
in batteries are districts that have supported politicians who didn't
vote for this. And let me remind folks on who
(09:37):
are listening that not a single Republican, not one in
the House or the Senate, voted for the Inflation Reduction Act.
And according to recent tracker that we've come across, they've
been over thirty attempts by House Republicans to turn.
Speaker 2 (09:54):
Over the IRA.
Speaker 3 (09:57):
So I think we are in a pretty per ca
aus situation when it comes to the longevity of the
IRA tax credits, and I think this is something that
investors are going to have to keep in mind. This
is why Chris, in my work at Jefferies, I've actually
spent more time looking at the bypart as an infrastructure
(10:17):
bill as the guide for what may in fact have
bipartisan support when it comes to the energy transition as
opposed to the IRA, and the bypart is an infrastructure
bill is quite interesting because there is a significant investment
in hydrogen and the desire to build these hydrogen hubs,
which President Biden just recently announced. And the second very
(10:40):
interesting part of the Infrastructure Bill is investments in the
creation of direct air capture hubs, a technology that I'm
very interested in because I think carbon removal is going
to be a significant part of the energy landscape in
the decades to come. And then I'm also very interested
in all the investments in the and the building a
(11:02):
better grid effort because I think that is also something
that we all can appreciate will benefit both Republican and
Democratic states and districts. So look, I think there's a
lot to be unpacked here, especially in an election year.
But our clients are all trying to figure out what
(11:23):
will be investible if there is a change in administration
or a change in the power center in Washington, and
we advise them to look at the technologies and the
sectors that have bipartisan support. The other one I would
add to that, by the way, is nuclear, where it
seems like Republicans and Democrats are coalescing around a pro
nuclear worldview, which is something that you couldn't have really
(11:47):
imagined even five or ten years ago.
Speaker 1 (11:50):
Right, I mean, you've already jumped into one of my
next questions, which was, you know, looking at some of
the strategy that could be in packful going forward, and
carbon removal was one that I had on my mind
as we're seeing huge investments in that technology. But you
know other solutions you alluded to, But is there any
(12:13):
others that you want to elaborate on a little more
or think are really going to be impactful going.
Speaker 3 (12:16):
Forward at the global level, it's important to just state clearly,
and these are numbers that come, of course from the
excellent work at Bloomberg New Energy Finance, that in twenty
twenty three, the world will have invested roughly one point
(12:36):
eight trillion to two trillion dollars somewhere in that ballpark
in the in low carbon technology. A corollary to that
data point, Chris, that I love is that more money
will have been invested last year in solar than in oil.
Speaker 2 (12:55):
Think about that.
Speaker 3 (12:56):
That is so hard to even imagine the amount of
solar installation that happened last year is up six hundred
x compared to twenty years ago. So my point in
saying all of this is that we are seeing exponential
adoption curves now in a whole bunch of technologies, in solar,
(13:16):
in wind, in electric vehicles, even in battery technologies, and
these exponential curves, they're starting from a pretty low base.
But as you know, one of the exciting things about
exponential change is that these compound growths mean that in
a few years you're at really sizeable numbers. And this
(13:37):
is true in the United States, and it's true globally,
and of course in many of these areas. China is
truly the world's leader because the amount of investments that
they are making oftentimes dwarfs the rest of the world.
To be very practical about this, what I would say
to listeners of this podcast is you should follow the
(14:00):
work and the thinking of organizations like the Rocky Mountain
Institute that have done a very good job articulating exponential
change and exponential adoption curves of technology. And what some
of their work has shown is that it takes the
same amount of time to go from zero percent to
(14:20):
five percent of a new technologies adoption as it takes
to go from five percent to fifty percent. So once
you hit that five percent level, the x you start
hitting these exponential adoption curves, and we're going to see
that over the next several years for a whole bunch
of technologies. We're gonna see this for batteries, We're going
(14:41):
to eventually see it for sustainable aviation fuels, We're going
to eventually eventually see it for carbon removal technologies. And
you should people should plot where these different technologies are
in these in these adoption rates, because if when you
do that, you can start getting a sense of what
might be the next solar or what might be the
next electric vehicle technology, and those will be things that
(15:05):
you will want to invest in.
Speaker 1 (15:07):
Well, those are very good points because obviously, you know,
as the technology comes, it does take a while to
ramp up and get scale, but once it hits scale,
you know, you see that exponential growth. Europe seems to
be a country that's a little more unified than the
US maybe in terms of some of these climate changes
and attacking the issues. You know, they're really kind of
(15:31):
trying to lead a charge towards a net zero world.
But there's also a lot of studies that talk about
emerging economies that are playing a critical role. So maybe
like a two part question, which other countries do you
think are kind of leading and what role do you
see emerging economies playing in a net zero world.
Speaker 3 (15:52):
Let me just say a few words about Europe and
then we can talk about emerging marchers, if that, If
that's okay with you. It's important to note that the OECD,
which is the club of high income countries all around
the world, US a bunch of European countries and a
few Asian countries peaked emissions actually in two thousand and seven,
(16:13):
so for the high income world, and now let me
be very clear, the peaked emissions at very high per
capita CO two emissions. But we are starting we are
seeing a decline of emissions on a per capita basis
in Europe. Europe has been i would say, at the
forefront of that. We are starting to sense, though in
(16:38):
our research and our work and our discussions with clients
all around the world, that there may be the beginnings
of a backlash to the energy transition and ESG issues
in Europe as well, and we're going to start to
see whether how real that is.
Speaker 2 (16:55):
Chris.
Speaker 3 (16:55):
This year with the elections in the UK, with the
European Parliament elections that are going to happen in the
first half of the year. And let me just be
very clear that in all of these elections in Europe,
and I would argue all around the world ESG slash
energy transition is on the ballot. Voters are absolutely going
(17:17):
to vote whether they support all of this state inn
intervention in order to decarbonize the world and to decarbonize
these countries. And we were just looking at some recent
survey work of what's on the mind for European voters,
and by far, when asked in a recent Eurobarometer survey,
(17:41):
what are the most important issues facing your country, the
most common response by far was cost of living at
forty five percent, followed by the economic situation at eighteen percent.
And so if energy transition comes at the cost of
cost of living and of the economy, I don't know
(18:03):
how much support there actually will be. Now, I don't
think the outcome can be as divergent as here in
the United States, where you have one political party which
basically doesn't believe in anthropogenic climate change. I don't think
we're we don't have real examples of that in Europe,
but we're starting to see some pretty loud voices on
(18:25):
the anti climate, anti energy transition discussion, and I think
we're going to follow that very very closely.
Speaker 2 (18:32):
And I would suggest for.
Speaker 3 (18:34):
Listeners whose priors lead them to the perspective that Europe
is always going to be at the cutting edge of
energy transition ESG, I would just put a question mark
on that prior.
Speaker 2 (18:48):
Going into twenty twenty four.
Speaker 3 (18:50):
In terms of your other question about emerging markets, Look,
you can't have a discussion about energy transition globally without
having a very good understanding of what's happening in China.
Speaker 2 (19:04):
And China is of.
Speaker 3 (19:06):
Course well over thirty percent of global CO two emissions.
I think thirty four to thirty five percent of global
CO two emissions of China, which, by the way, just
to put that into context, the United States is twelve
percent of global CO two emissions. Of course, our per
capita emissions are much higher here than in China, but
as a total sum, China is by far the largest emitter,
(19:29):
and yet at the same time, China's also the largest
investor in solar, is the largest investor in wind, is
largest rollout of electric vehicles.
Speaker 2 (19:37):
You're now seeing that the largest.
Speaker 3 (19:39):
Evy company in the world by sales is a Chinese company.
Speaker 2 (19:44):
It's not an American company.
Speaker 3 (19:45):
So the big question around China, we think, and the
data point that I think the energy transition world should
be really asking and studying, is when does China peak emissions?
And there are many analysts who think that that might
happen actually in twenty twenty four, which would be a
(20:06):
watershed moment because the Chinese government the goal was to
do this by twenty thirty and if they reached that
goal six years earlier, then I think that's a very
bullish view of where China is in terms of energy transition,
investments in solar, investments.
Speaker 2 (20:23):
In wind and so on.
Speaker 3 (20:24):
The other country that we are really interested in at
jeffrees and as you know, we've written about a great
deal and I recently took over a dozen global investors
to go and study is India. India is very interesting
because India's emissions over the short and potentially over the
(20:47):
medium term two will rise. Let's not forget that India's
per capita CO two emissions are around two tons per capita.
That number in China is closer to ten tons per capita,
and number of the United States is closer to fifteen
tons per capital So India starts at a very different
place than China does, and certainly then the high income
(21:10):
West does. And yet the potential for renewable energy in
India is.
Speaker 2 (21:19):
Astronomic.
Speaker 3 (21:21):
The resources for solar, the resources for wind are very
very positive, and India sees a renewable energy industry as
strategically important because it allows the country to have energy
independence and not be so in the throes of global
(21:43):
energy politics in order to fuel their own country. Now,
I think when we look at India, which as you know,
has been the best performing equity market, or one of
the best performing equity markets in the world, and one
of the definitely best performing emerging market equity markets in
the world, some of the things that we have to
(22:05):
figure out are the following. Number one is the coal
question in India. Our view at Jefferies is that India
is going to have an exponential growth in renewables and
coal demand in India is also going to increase, and
both stories are true at the same time. And what
you have to remember, Chris, is that India has over
(22:27):
two hundred years of coal reserves. So for them to
keep that underground and not use is a tough It's
a tough ask, especially when entire states, especially in Eastern India.
Their economies are tied to the coal industry. So the
first question is what happens to coal in India and
(22:48):
do we see a peaking of coal earlier than projections.
I think that will happen earlier than what most people
think because of pure economics, because solar and wind plus
storage is become so much cheaper than coal. The second
question in India that's very interesting is what do the
big players do. So much of the energy transition story
(23:12):
in India depends on companies like Reliance Industries, companies like Adani.
These are huge businesses that have major capital expenditure programs
and they can really change the direction of India and
energy transition by their own decision making. So we'll be
following a handful of companies to get a good understanding
(23:34):
of what's happening there. And then the third thing that
we're really interested when it comes to India is how
much international support does India get in order to continue
to grow, but to do so in a low carbon way.
And that is a question of international climate finance and
whether India receives grant and low cost concessional financing from
(23:55):
the West, I got to say, I'm not very optimistic
about that, so we'll have to say around there. So
we're very interested in what's happening in China in terms
of peak emissions, and we're very interested in India because
India will to us give us the roadmap of whether
a low slash lower middle income country can grow without
(24:17):
carbonizing significantly. And we think there's no better case study
over the next five to ten years than India will
be right.
Speaker 1 (24:25):
And you mentioned estimates for twenty thirty for peak emissions
in China, but you have an estimate or is there
an estimate for peak coal in India?
Speaker 3 (24:35):
There are many estimates for when a coal may peak,
but the numbers that we are looking at is that
that won't happen until the late twenty thirties early twenty forties.
Speaker 1 (24:47):
So still a ton of it is coal consumption just
to help the expansion basically right correct that we're going
to see and to get all these other technologies up
to scale.
Speaker 3 (24:58):
That's right, And I think India find itself in what
could be a complicated position globally because as the twenty
thirties roll around, CO two emissions globally will likely have peaked,
and hopefully we'll start there to send downwards. But India's
CO two emissions may not have peaked, will likely not
(25:19):
have peaked, and so there is concern I think for
some of us analysts in the industry that India at
the time will then be considered sort of the black sheep.
You know, a country's emissions are growing in a time
when global emissions are falling. But that's why when you
study these things, you have to really study where these
countries are in their development trajectories and and and be
(25:44):
careful not to compare apples with oranges.
Speaker 1 (25:46):
I mean, there continues to be a ton of investment,
as we've mentioned, What do you think in terms of
new energy financing? You know, how much more is needed?
Is it growing? Will it continue to grow? I mean,
we know it's growing, but what are your thoughts on that.
Is the growth of the financing behind it going to
be exponential as well? Or are we kind of at
(26:10):
good enough levels or do we still need a ton
of investment.
Speaker 3 (26:13):
I think that as the world continues its energy transition,
which by the way, has just started, it's important for
folks on the line to remember that you know, and
you and I Chris were talking about this before we
started chatting, which is eighty percent of the world's primary
energy today still comes from fossil fuels, a number that
(26:36):
was eighty four percent twenty years ago. So we have
a long ways to go. I think in the high
income world, so US, Europe, Japan, we can talk about
in a second, because they're doing some very interesting things
around transition finance, which is a concept we should discuss.
(26:58):
I don't think finance is really a stumbling block to
the energy transition.
Speaker 2 (27:04):
Now.
Speaker 3 (27:05):
Very high cost of capital will slow things down, but
I think we're already have seen peak interest rates here
in the United States, and as those rates start coming down,
I think cost of financing won't be an issue. Where
there's a real challenge when it comes to capital is
(27:26):
for low and middle income countries. The cost of capital
in low and middle income countries. You know, if you
are in sub Srian Africa or countries in Southeast Asia,
you're looking at ten fifteen to twenty percent cost of
financing in order to build a solar plant or to
build wind that's simply too high for the pace of
(27:49):
the buildout that's required. And so I think when we
talk about the financial elements of all of this. We
should have a much clearer focus now in low and
middle income countries, and that's why I'm a big believer.
What I've done my doctoral research on is the role
(28:10):
of development finance institutions, both institutions like the World Bank
and the African Development Bank, but also national development banks
as a way to provide long term, low cost financing
to low and middle income countries to allow them to
be able to make major investment pushes. So that's what
(28:30):
I would say in that regard when it comes to
the financial parts of this. But when you talk to
project developers in the high income world today, they really
don't see access to capital as the stumbling block that
it used to be. The stumbling blocks are more things
which are in some ways Chris even thornier, like what
(28:51):
we discussed earlier, the grids, or human capital and workforce issues,
or these local domestic requirements for manufacturing to build to
build out projects. Those are the real issues that might
slow this whole story down. But I think one should
be optimistic in that regard as well, because I can
(29:12):
tell you on grids, for example, up until a year ago,
nobody really talked about the grids, right, it wasn't even
on people's energy developers certainly talked about it, but in
the larger mainstream financial and business worlds it wasn't an
agenda topic. Now when we write about this, or today
we hosted a call with the International Energy Agency and
(29:33):
their work on grids. We get more clients listening to
those calls than anything else that we do. So people
are waking up to those issues, and I think that's
a good thing.
Speaker 1 (29:43):
Yeah, And I think when it comes to the grid,
we've seen a lot of different ways that the grids
are getting improved, not just in terms of hardening the grids,
but then also the connectivity and trying to modernize them
and get them up and running so that more transmission
can go through it from other sources. So we're obviously
making strides. But yeah, like you said a few years ago,
(30:05):
it wasn't even on a second thought maybe to say
that's right now. You kind of mentioned the transition instruments
in Japan. But you know, my focus is on bonds,
so I'd be remiss not to ask you your thoughts
on the green finance and markets in terms of you know,
green social sustainability, bonds, what do you think of the market?
(30:26):
Does it have staying power? And then the other part
was going to be what other instruments do you see?
And I was going to allude to the fact like
transition bonds are now a thing again in Japan, but also,
you know, blue bonds were thrown around a little bit
for a while, and some other debt for nature swaps.
So any thoughts on other types of financing or green financing.
Speaker 3 (30:48):
It's a really wonderful question. Do we need a separate
bucket of green finance in a world that is greening?
I mean, it's a really interesting debate, and there are
two sides to this.
Speaker 2 (31:05):
Argument. Like everything right, I think that the.
Speaker 3 (31:09):
Whole green finance world did a wonderful job in terms
of socializing the idea of large scale investment in low
carbon technology. I think the amount of money that was
capitalized through the debt markets, through green instruments, it'll go
(31:30):
down in history as being transformational, not just the amount
of investments that happened, but I think, more importantly, Chris,
the opening of investors and issuers' minds to the importance
of these topics. That said, we're now at a stage
where I think standard plane vanilla. Green bonds mean less
(31:53):
and less and less, and you're seeing that in the pricing.
As you know better than I do. Can issuers raise
capital more cheaply today by issuing a green bond? It's
not quite clear anymore in the numbers rights that greenium
has sort of gone away. And is that a good
thing or a bad thing?
Speaker 2 (32:12):
Again?
Speaker 3 (32:13):
We can all discuss and debate, But like anything in finance,
there's innovation. And where I think that innovation is happening.
Where I'm very excited about is what's.
Speaker 2 (32:22):
Happening in Japan.
Speaker 3 (32:24):
Japan's g X Plan, which was announced last year, is
a huge deal. By the way, Chris and most people
who follow the energy transition don't spend enough time studying
the size and the scale of what the Prime Minister
has put out. Just to put the numbers clearly, this
(32:46):
GX Plan is a one hundred and fifty trillion yen
investment program over the next ten years, okay, or investment ambition. Now,
if you do the math, that's around a trillion dollars
over the next ten years, or one hundred billion dollars
on average per year for the next ten years. One
(33:08):
hundred million dollars on a four trillion dollar economy, which
is roughly the size of the Japanese economy, would be
the equivalent of a five hundred billion dollar a year
investment program in the United States on our twenty trillion
dollar economy. So this is big. We're talking about big
money here. Massive. Now, will that ambition actually be met,
(33:28):
will we actually get to that? There are huge question
marks around that, but the scale of theission is important.
So that's point number one. Point number two is the
financial mechanism that the Japanese government is trying to use
in order to spur this investment is the so called
transition bonds. And over the next few weeks, Japan is
(33:49):
going to issue sovereign transition bonds that the use of proceeds,
by the way, Chris, are going to go into things
that the pure green crowd may not love. It's going
to go into things like carbon capture and sequestration and
you know, green ammonia and hydrogen and all of these
(34:13):
sort of And I haven't seen nuclear, but it wouldn't
surprise me all these things which the green crowd is says, well,
I don't know is that green?
Speaker 2 (34:23):
Is that not green?
Speaker 3 (34:24):
But I think the Japanese government has been very practical, says, look,
we are an industrial economy and for us, we need
to be investing in a transition. And this transition is
multi decades, and it means that we're going to invest
in things that you may not love from a pure
green perspective, but are things that we are going to
find important.
Speaker 2 (34:44):
What's important to also.
Speaker 3 (34:45):
Note about how these bonds will be paid back is
that there's going to be a significant carbon pricing and
carbon market set up in Japan as a way to
fund these bonds. And that's another part of the financial
picture when it comes to energy transition and green finance
(35:06):
that I think we should discuss at some point, which
is whether carbon markets will play an important role in
all of this. And I think Japan is going to
give us a lot of real life examples over the
next five years on how big these carbon markets can get.
So I'm very interested in what's happening there on the
(35:28):
transition side. I think the more plain vanilla stuff, I
think that will probably continue, but it will get will
be less of the most exciting parts of green finance
going forward.
Speaker 1 (35:40):
Yeah, very good points. And one other question that I
had planned to bring up to in terms of, you know,
a more unified carbon pricing model, you know, I mean,
does something have to come out of one of the cops,
you know, where the world decides, Okay, we're going to
price carbon the same type of thing so that everybody's
on a level playing filament. That'd be a very interesting approach.
(36:03):
I doubt it happens, obviously, but you know, we do.
We need some kind of better pricing model or some
kind of better carbon taxation model. What are your thoughts?
Speaker 3 (36:13):
You're a dreamer, Chris, and that's what why I like
you so much, look like, I think that anyone who's
been around the climate discussions for the past few decades
know that this is probably the one area everyone agrees
on that we need to internalize this externality, which is
(36:35):
that the damages that we are caused by emitting CO
two and other greenhouse gases are not paid for by anyone,
and we have to start paying those costs. And there
are many ways to do that, and there are many
different mechanisms, but at a basic point, I think that's
all quite well understood.
Speaker 2 (36:53):
In globally. Now.
Speaker 3 (36:56):
I don't have the number exactly off the top of
my head. But world the World Bank keeps this database,
and I think we're at around twenty to twenty five
percent of global CO two emissions are under some form
of carbon pricing. That is up from less than ten
percent ten years ago. So you've seen a larger and
(37:16):
larger percentage of global emissions are under some type of
carbon pricing. But the weighted average price per ton of
CO two globally is around five dollars a ton. That
number needs to be more like fifty to one hundred
and fifty for this to be meaningful. To answer your question,
do I see anything like a global carbon price or
(37:39):
carbon tax ever being established. No, that said, one of
these sort of sleeper issues out there, sleeper topics that
is sort of an indirect way of getting at a
global carbon price or global carbon pricing mechanism. Are these
carbon border adjustment mechanisms, these z bams. And Europe has
(38:03):
actually already begun implementing its carbon border adjustment mechanism. And I,
as you know, spend a lot of time in Washington
talking to folks from across the aisle and from all
the different political parties and political persuasions, and it seems
like there's also growing bipartisan support and interest around some
(38:26):
type of carbon border adjustment mechanism here in the United States,
and that is a way of starting to put global
prices using national frameworks. Now you might have then competing
carbon pricing mechanisms. You know, let's imagine the US has
a carbon border adjustment mechanism one day and we are
(38:47):
importing stuff from China, which has its own emissions trading
system and its own carbon price. How those two will
speak to one another is a complicated question, but I
think you know, long story short, is that to answer
your question, yes, carbon pricing is absolutely needed. Number two
is there will not be a global carbon price. But
(39:09):
number three is that we're starting to see the beginnings
of these mechanisms, and all of us in the business
and financial world should follow this closely because it could
be an indirect way of getting there.
Speaker 1 (39:21):
Great excellent. I think those are some really excellent points,
especially how Europe, as you said with the border tax
is you know, they're thinking about it, they're looking at it,
and we're trying so I think it's all all positive obviously.
You know, I saw an interview you did recently coming
out of COP twenty eight where you were feeling pretty positive.
(39:44):
As we're kind of running a little short on time.
Are you still feeling pretty positive in terms of the
steps that we're taking climate change, we're attacking it in
the right way, or do you still think this is
a very long, arduous process that we're nowhere near solvin.
Speaker 3 (40:00):
I would say both. What's the optimistic story. The optimistic
story is that we are investing more in low carbon
tech than ever before. The optimistic story is that central
banks around the world are thinking about climate change in
a serious way. Unlike in the past, Credit rating agencies
(40:21):
are all now doing much more work pricing climate and
other ESG issues. Every single corporate executive I meet, every
single investment firm that I engage with, which is basically
every investment firm in the world has smart, sophisticated, thoughtful
people looking at both the risks and the opportunities of
(40:42):
this issue. The optimistic story is also what the International
Energy Agency itself has said, which is, we have already
shaved off one degree celsius of where we thought the
world would get to by twenty one hundred from twenty
fifteen to today, just eight years, we have already taken off
(41:03):
a degree plus because of the rapid expansion of renewables,
a lot of it was policy enabled. So that's all
the optimistic story, and that's real. That's not fake, that's
not fake news. This is real investments and real changes
in mindset, and I think that's very important. The thing
that keeps me up at night when it comes to
(41:24):
the energy transition is number one, and Bloomberg has actually
done a very good job writing about this, so kudos
to all of you. Is the whole notion of tipping points,
that the climate system could have some non linear, irreversible
change as we start warming up. And once the toothpaste
(41:48):
is out of the tube in that regard, it's pretty
much impossible to put the toothpaste back in. And there's
some wonderful academics we follow the work of Professor Tim
Lenton at the University of Exeter and others, but that
have outlined when these tipping points may be hit, what
the damages could be, and so on, and we're getting
(42:10):
really close to that. So the first thing that worries
me a little bit is the time just sort of
runs out and we could be getting there sooner than
any of us would like. And the second thing that
has me worried, is you know, I read some statistics
or I spoke about some statistics about polling data in Europe.
(42:34):
I'll give you another poll which I find really amazing
about climate change here in the United States, which is
two thirds of Americans recently pulled say that they're not
willing to spend even one dollar a month as a
surcharge to their energy bills in order to address climate change.
All right, at its very core, we're going to have
(42:59):
to pay for things that we haven't paid for in
the past. Now it might be through increased taxation, it
might be through higher borrowing costs, it might be through
a carbon price. And in the short term, the energy transition,
I believe is inflationary. Over the long term, it is
deflationary because you are going to have very cheap energy,
(43:22):
very renewable energy, as opposed to all the volatile prices
that come from fossil fuels. But upfront costs and upfront
investments are significant. And I'm worried if that message.
Speaker 2 (43:34):
Isn't made clear to voters.
Speaker 3 (43:37):
Then in a year where by our account, they are
over eighty elections this year, four billion people, or I
should say citizens of countries with total population of four
billion people will go to the ballot this year in
order to vote for their heads of state and their
(43:58):
municipal and congressional leaders. If this whole agenda doesn't get
support at the ballot box, we could start seeing a
decline of interest. And we should not forget that a
lot of the energy transition progress that we've made has
been because of policy, and that policy can be reversed.
(44:18):
And that's this thing that also keeps me up at
night and something that we're going to be studying very
closely in our work at Jeffres.
Speaker 1 (44:25):
That's excellent. I really appreciate you taking the time to
chat with us today. I mean, I thought we had
a very in depth and thoughtful discussion. Obviously, if people
have any questions or comments regarding any of the content
of this podcast, I could reach out to us directly
and we could get back to you. But Antiquette, thank
(44:46):
you very.
Speaker 2 (44:46):
Much, thanks for having me great chatting with you.
Speaker 1 (44:48):
Thank you, and I'd also like to thank all of
our listeners for joining. You can find more information on
climate investments, carbon markets, and a whole array of other
topics by going to BI ESG, The Bloomberg terminal, which
will open up to our Bloomberg Intelligence Research Dashboard. If
you have any ESG quandary or burning questions you would
like to ask BI experts, please send us an email
(45:11):
at ESG Currents at bloomberg dot net
ESG has become established as a key business theme as
companies and investors seek to navigate the climate crisis, energy transition,
social mega trends, mounting regulatory attention, and pressures from other stakeholders.
The rapidly evolving landscape has become innundated with acronyms, buzzwords,
and lingo, and we aim to break these down with
(00:29):
industry experts. Welcome to ESG Currents, brought to you by
Bloomberg Intelligence, your guide to navigating the involving ESG space,
one topic at a time. I'm Chris Rawdy, Senior ESG
credit analyst and your host for today's episode. Today we're
talking with anaquet Shaw, Managing director and global head of
(00:50):
Sustainability and Transition Strategy at Jeffreys. Welcome, Annicut, Thanks so much.
Speaker 2 (00:56):
It's great to be here.
Speaker 1 (00:57):
You know, I'm hoping to discuss kind of where we
are in energy transition, where we're headed, what investors are facing,
maybe short to medium trends you're seeing or expecting, but
I'd really like to jump right in with the US
because we're facing a lot of paradoxes. You know, fossil
(01:17):
fuels still eighty percent of energy basically, But there's been
a ton of investment recently, and the body and administration
has claimed to be focused on and willing to spend
on the issues. You know, the IRA was passed, but
do you think we're going to see meaningful results? And
what are some of the other plans or proposals you
see coming.
Speaker 3 (01:38):
Well, it's great to be here, and that's a great
place to get started. One of the positive surprises for
the energy transition crowd over the last couple of years
has been the Inflation Reduction Act. If you'll recall a
couple of years ago, everyone thought that that bill was
dead and that there was going to be no significant,
(01:59):
major public investment from the Biden administration on the energy transition.
And then out of nowhere came this compromise bill, which
initially the experts had put as a three hundred to
four hundred billion dollar spending program, and now some estimates
have said that that could be upwards of one to
two trillion dollars of investment in energy transition, mostly through
(02:22):
tax credits. So the key question is how significant is
it and can these actually can these tax credits potentially
persist in a election year because of course twenty twenty
four is a major election year here in the United
States and all around the world. My view about the
Inflation Reduction Act is that it is an important signal
(02:47):
that the United States is putting out to the world
that is leading to real investments. However, Chris, we are
soon going to hit up against some very real roadblocks,
and these roadblocks, if not addressed, we'll actually slow down
and negate the potential positive impact of the IRA when
it comes to energy transition and decarbonization. By far, the
(03:11):
single biggest roadblock when it comes to the buildout of
renewables in this country is the grid. And we at
Jeffrey's have been writing about the grid now for well
over a year, helping our clients understand if we don't
solve for the problems of the interconnection cues, where there
are now literally thousands of gigawatts of projects renewable projects
(03:37):
that are waiting in the interconnection cues, if we don't
solve that issue, and it's a policy issue, a lot
of these projects are going to die on the vine.
And although we are starting to see some movement from FIRK,
I'm not very optimistic about that. I'm also not very
optimistic about permitting reform to the scale of what's required
(03:57):
for some of these grid projects to be built in
time for the energy transition. The second roadblock that the
United States is going to come up against is the
worker worker shortages when it comes to building out renewables.
Speaker 2 (04:11):
It's not a.
Speaker 3 (04:12):
Very sexy topic, but estimates are anywhere between We're short
between half a million and a million electricians that are
required to do all of the solar installation and the
hvacs and so on. You can't do that overnight. You
need a real system, and you need a real plan,
and I don't see that happening either. And then the
(04:34):
third roadblock that we see, which is a significant one,
is trade tensions with China. The idea that the US
can build the manufacturing capacity to do all of this
internally is a joke and it's not going to happen.
And so again, the IRA is significant. Real investments have
been made on the back of it. But these roadblocks,
(04:56):
these real structural roadblocks, need to be assessed and need
to be overcome in order for the IRA to have
its impact. And I'm not seeing those being solved anywhere
close to what's needed, right.
Speaker 1 (05:08):
I mean, you kind of pointed to one of the
major roadblock being you know, permanitting and some of the
regulations that we're seeing. I mean, obviously there's in the US,
there's been some anti ESG movement that we've seen, and
that's obviously a growing risk as we see states contradict
federal so like the SEC climate disclosure requirements are coming
(05:32):
to mind where states are threatening litigation permitting is obviously
an issue. In California recently, you know, they changed some rules,
so solar companies are going out of business because they
can't get as much solar done. What are your thoughts
on some of the potential opposition that we're seeing and
the misalignments maybe between state and federal.
Speaker 3 (05:54):
The ESG backlash in the United States has been a
vociferous and very over the last couple of years. I
think even for those of us who are quite you know,
quite clearheaded when it comes to the analytics of US politics,
we were caught a little bit by surprise by the
(06:16):
scale of the backlash. And what's important to note about
the ESG backlash is that so much of it, Chris,
in my opinion, comes from a lack of clear definitions
of what this project is all about and what the
goal of this project is all about. So when we
talk about ESG investing in the capital markets, to us
(06:40):
at Jeffreys, ESG is not about solving environmental, social, and
governance problems. It's about better analyzing those issues, these externalities,
these intangibles in order for an investor to make a
better investment decision. For others, the ESG movement is about
(07:01):
solving climate change, it's about solving social disparities and so
on and so forth. And frankly speaking, Chris, I think
the investment industry was playing fast and loose with how
they were using the term, and they got caught out,
and they got caught out quite real and now that's
created a whole host of problems for the largest.
Speaker 2 (07:22):
Investment managers in the world.
Speaker 3 (07:23):
So that's the first point I would say, is that
there wasn't very clear articulation about what ESG means and
that has led to a lot of this. The second
point is around the energy transition and about yea.
Speaker 1 (07:35):
Why a lot of a managers stopped using ESG as
they're that's a buzzword, right, They've pulled way back from
ESG as a buzzword maybe still using sustainability or sustainable practices,
but ESG has kind of been quietly not talked about
as much.
Speaker 3 (07:52):
Absolutely, we've taken it out of our titles because it
was just creating a really negative real action, whereas the
work that we do is pretty standard and non offensive.
And so, yes, the term has certainly been vilified now,
and I don't think we're going to be hearing a
(08:12):
lot of ESG in the United States in the years
to come when it comes to the energy transition. I
think it's important for folks to always remember that the
United States is a fossil fuel superpower. You know, we
have such a large and dynamic economy here in the
(08:32):
United States.
Speaker 2 (08:33):
People offer the oh, the US is.
Speaker 3 (08:34):
A financial hub of the world, which it is, or
United States is a technology hub of the world, which
it is. But the US is also an oil and
gas superpower. And so it's only it's only predictable that
we are going to see a response from the fossil
fuel industry through political means when it comes to the
(08:56):
pace of the energy transition. Now, let's talk about this
in in the real policy and politics of it all.
As you know very well, Chris Over sixty. In some estimates,
over eighty percent of the Inflation Reduction Act investments have
(09:17):
gone to Republican states and Republican congressional districts. So the
biggest beneficiaries of the IRA investments in solar and wind
in batteries are districts that have supported politicians who didn't
vote for this. And let me remind folks on who
(09:37):
are listening that not a single Republican, not one in
the House or the Senate, voted for the Inflation Reduction Act.
And according to recent tracker that we've come across, they've
been over thirty attempts by House Republicans to turn.
Speaker 2 (09:54):
Over the IRA.
Speaker 3 (09:57):
So I think we are in a pretty per ca
aus situation when it comes to the longevity of the
IRA tax credits, and I think this is something that
investors are going to have to keep in mind. This
is why Chris, in my work at Jefferies, I've actually
spent more time looking at the bypart as an infrastructure
(10:17):
bill as the guide for what may in fact have
bipartisan support when it comes to the energy transition as
opposed to the IRA, and the bypart is an infrastructure
bill is quite interesting because there is a significant investment
in hydrogen and the desire to build these hydrogen hubs,
which President Biden just recently announced. And the second very
(10:40):
interesting part of the Infrastructure Bill is investments in the
creation of direct air capture hubs, a technology that I'm
very interested in because I think carbon removal is going
to be a significant part of the energy landscape in
the decades to come. And then I'm also very interested
in all the investments in the and the building a
(11:02):
better grid effort because I think that is also something
that we all can appreciate will benefit both Republican and
Democratic states and districts. So look, I think there's a
lot to be unpacked here, especially in an election year.
But our clients are all trying to figure out what
(11:23):
will be investible if there is a change in administration
or a change in the power center in Washington, and
we advise them to look at the technologies and the
sectors that have bipartisan support. The other one I would
add to that, by the way, is nuclear, where it
seems like Republicans and Democrats are coalescing around a pro
nuclear worldview, which is something that you couldn't have really
(11:47):
imagined even five or ten years ago.
Speaker 1 (11:50):
Right, I mean, you've already jumped into one of my
next questions, which was, you know, looking at some of
the strategy that could be in packful going forward, and
carbon removal was one that I had on my mind
as we're seeing huge investments in that technology. But you
know other solutions you alluded to, But is there any
(12:13):
others that you want to elaborate on a little more
or think are really going to be impactful going.
Speaker 3 (12:16):
Forward at the global level, it's important to just state clearly,
and these are numbers that come, of course from the
excellent work at Bloomberg New Energy Finance, that in twenty
twenty three, the world will have invested roughly one point
(12:36):
eight trillion to two trillion dollars somewhere in that ballpark
in the in low carbon technology. A corollary to that
data point, Chris, that I love is that more money
will have been invested last year in solar than in oil.
Speaker 2 (12:55):
Think about that.
Speaker 3 (12:56):
That is so hard to even imagine the amount of
solar installation that happened last year is up six hundred
x compared to twenty years ago. So my point in
saying all of this is that we are seeing exponential
adoption curves now in a whole bunch of technologies, in solar,
(13:16):
in wind, in electric vehicles, even in battery technologies, and
these exponential curves, they're starting from a pretty low base.
But as you know, one of the exciting things about
exponential change is that these compound growths mean that in
a few years you're at really sizeable numbers. And this
(13:37):
is true in the United States, and it's true globally,
and of course in many of these areas. China is
truly the world's leader because the amount of investments that
they are making oftentimes dwarfs the rest of the world.
To be very practical about this, what I would say
to listeners of this podcast is you should follow the
(14:00):
work and the thinking of organizations like the Rocky Mountain
Institute that have done a very good job articulating exponential
change and exponential adoption curves of technology. And what some
of their work has shown is that it takes the
same amount of time to go from zero percent to
(14:20):
five percent of a new technologies adoption as it takes
to go from five percent to fifty percent. So once
you hit that five percent level, the x you start
hitting these exponential adoption curves, and we're going to see
that over the next several years for a whole bunch
of technologies. We're gonna see this for batteries, We're going
(14:41):
to eventually see it for sustainable aviation fuels, We're going
to eventually eventually see it for carbon removal technologies. And
you should people should plot where these different technologies are
in these in these adoption rates, because if when you
do that, you can start getting a sense of what
might be the next solar or what might be the
next electric vehicle technology, and those will be things that
(15:05):
you will want to invest in.
Speaker 1 (15:07):
Well, those are very good points because obviously, you know,
as the technology comes, it does take a while to
ramp up and get scale, but once it hits scale,
you know, you see that exponential growth. Europe seems to
be a country that's a little more unified than the
US maybe in terms of some of these climate changes
and attacking the issues. You know, they're really kind of
(15:31):
trying to lead a charge towards a net zero world.
But there's also a lot of studies that talk about
emerging economies that are playing a critical role. So maybe
like a two part question, which other countries do you
think are kind of leading and what role do you
see emerging economies playing in a net zero world.
Speaker 3 (15:52):
Let me just say a few words about Europe and
then we can talk about emerging marchers, if that, If
that's okay with you. It's important to note that the OECD,
which is the club of high income countries all around
the world, US a bunch of European countries and a
few Asian countries peaked emissions actually in two thousand and seven,
(16:13):
so for the high income world, and now let me
be very clear, the peaked emissions at very high per
capita CO two emissions. But we are starting we are
seeing a decline of emissions on a per capita basis
in Europe. Europe has been i would say, at the
forefront of that. We are starting to sense, though in
(16:38):
our research and our work and our discussions with clients
all around the world, that there may be the beginnings
of a backlash to the energy transition and ESG issues
in Europe as well, and we're going to start to
see whether how real that is.
Speaker 2 (16:55):
Chris.
Speaker 3 (16:55):
This year with the elections in the UK, with the
European Parliament elections that are going to happen in the
first half of the year. And let me just be
very clear that in all of these elections in Europe,
and I would argue all around the world ESG slash
energy transition is on the ballot. Voters are absolutely going
(17:17):
to vote whether they support all of this state inn
intervention in order to decarbonize the world and to decarbonize
these countries. And we were just looking at some recent
survey work of what's on the mind for European voters,
and by far, when asked in a recent Eurobarometer survey,
(17:41):
what are the most important issues facing your country, the
most common response by far was cost of living at
forty five percent, followed by the economic situation at eighteen percent.
And so if energy transition comes at the cost of
cost of living and of the economy, I don't know
(18:03):
how much support there actually will be. Now, I don't
think the outcome can be as divergent as here in
the United States, where you have one political party which
basically doesn't believe in anthropogenic climate change. I don't think
we're we don't have real examples of that in Europe,
but we're starting to see some pretty loud voices on
(18:25):
the anti climate, anti energy transition discussion, and I think
we're going to follow that very very closely.
Speaker 2 (18:32):
And I would suggest for.
Speaker 3 (18:34):
Listeners whose priors lead them to the perspective that Europe
is always going to be at the cutting edge of
energy transition ESG, I would just put a question mark
on that prior.
Speaker 2 (18:48):
Going into twenty twenty four.
Speaker 3 (18:50):
In terms of your other question about emerging markets, Look,
you can't have a discussion about energy transition globally without
having a very good understanding of what's happening in China.
Speaker 2 (19:04):
And China is of.
Speaker 3 (19:06):
Course well over thirty percent of global CO two emissions.
I think thirty four to thirty five percent of global
CO two emissions of China, which, by the way, just
to put that into context, the United States is twelve
percent of global CO two emissions. Of course, our per
capita emissions are much higher here than in China, but
as a total sum, China is by far the largest emitter,
(19:29):
and yet at the same time, China's also the largest
investor in solar, is the largest investor in wind, is
largest rollout of electric vehicles.
Speaker 2 (19:37):
You're now seeing that the largest.
Speaker 3 (19:39):
Evy company in the world by sales is a Chinese company.
Speaker 2 (19:44):
It's not an American company.
Speaker 3 (19:45):
So the big question around China, we think, and the
data point that I think the energy transition world should
be really asking and studying, is when does China peak emissions?
And there are many analysts who think that that might
happen actually in twenty twenty four, which would be a
(20:06):
watershed moment because the Chinese government the goal was to
do this by twenty thirty and if they reached that
goal six years earlier, then I think that's a very
bullish view of where China is in terms of energy transition,
investments in solar, investments.
Speaker 2 (20:23):
In wind and so on.
Speaker 3 (20:24):
The other country that we are really interested in at
jeffrees and as you know, we've written about a great
deal and I recently took over a dozen global investors
to go and study is India. India is very interesting
because India's emissions over the short and potentially over the
(20:47):
medium term two will rise. Let's not forget that India's
per capita CO two emissions are around two tons per capita.
That number in China is closer to ten tons per capita,
and number of the United States is closer to fifteen
tons per capital So India starts at a very different
place than China does, and certainly then the high income
(21:10):
West does. And yet the potential for renewable energy in
India is.
Speaker 2 (21:19):
Astronomic.
Speaker 3 (21:21):
The resources for solar, the resources for wind are very
very positive, and India sees a renewable energy industry as
strategically important because it allows the country to have energy
independence and not be so in the throes of global
(21:43):
energy politics in order to fuel their own country. Now,
I think when we look at India, which as you know,
has been the best performing equity market, or one of
the best performing equity markets in the world, and one
of the definitely best performing emerging market equity markets in
the world, some of the things that we have to
(22:05):
figure out are the following. Number one is the coal
question in India. Our view at Jefferies is that India
is going to have an exponential growth in renewables and
coal demand in India is also going to increase, and
both stories are true at the same time. And what
you have to remember, Chris, is that India has over
(22:27):
two hundred years of coal reserves. So for them to
keep that underground and not use is a tough It's
a tough ask, especially when entire states, especially in Eastern India.
Their economies are tied to the coal industry. So the
first question is what happens to coal in India and
(22:48):
do we see a peaking of coal earlier than projections.
I think that will happen earlier than what most people
think because of pure economics, because solar and wind plus
storage is become so much cheaper than coal. The second
question in India that's very interesting is what do the
big players do. So much of the energy transition story
(23:12):
in India depends on companies like Reliance Industries, companies like Adani.
These are huge businesses that have major capital expenditure programs
and they can really change the direction of India and
energy transition by their own decision making. So we'll be
following a handful of companies to get a good understanding
(23:34):
of what's happening there. And then the third thing that
we're really interested when it comes to India is how
much international support does India get in order to continue
to grow, but to do so in a low carbon way.
And that is a question of international climate finance and
whether India receives grant and low cost concessional financing from
(23:55):
the West, I got to say, I'm not very optimistic
about that, so we'll have to say around there. So
we're very interested in what's happening in China in terms
of peak emissions, and we're very interested in India because
India will to us give us the roadmap of whether
a low slash lower middle income country can grow without
(24:17):
carbonizing significantly. And we think there's no better case study
over the next five to ten years than India will
be right.
Speaker 1 (24:25):
And you mentioned estimates for twenty thirty for peak emissions
in China, but you have an estimate or is there
an estimate for peak coal in India?
Speaker 3 (24:35):
There are many estimates for when a coal may peak,
but the numbers that we are looking at is that
that won't happen until the late twenty thirties early twenty forties.
Speaker 1 (24:47):
So still a ton of it is coal consumption just
to help the expansion basically right correct that we're going
to see and to get all these other technologies up
to scale.
Speaker 3 (24:58):
That's right, And I think India find itself in what
could be a complicated position globally because as the twenty
thirties roll around, CO two emissions globally will likely have peaked,
and hopefully we'll start there to send downwards. But India's
CO two emissions may not have peaked, will likely not
(25:19):
have peaked, and so there is concern I think for
some of us analysts in the industry that India at
the time will then be considered sort of the black sheep.
You know, a country's emissions are growing in a time
when global emissions are falling. But that's why when you
study these things, you have to really study where these
countries are in their development trajectories and and and be
(25:44):
careful not to compare apples with oranges.
Speaker 1 (25:46):
I mean, there continues to be a ton of investment,
as we've mentioned, What do you think in terms of
new energy financing? You know, how much more is needed?
Is it growing? Will it continue to grow? I mean,
we know it's growing, but what are your thoughts on that.
Is the growth of the financing behind it going to
be exponential as well? Or are we kind of at
(26:10):
good enough levels or do we still need a ton
of investment.
Speaker 3 (26:13):
I think that as the world continues its energy transition,
which by the way, has just started, it's important for
folks on the line to remember that you know, and
you and I Chris were talking about this before we
started chatting, which is eighty percent of the world's primary
energy today still comes from fossil fuels, a number that
(26:36):
was eighty four percent twenty years ago. So we have
a long ways to go. I think in the high
income world, so US, Europe, Japan, we can talk about
in a second, because they're doing some very interesting things
around transition finance, which is a concept we should discuss.
(26:58):
I don't think finance is really a stumbling block to
the energy transition.
Speaker 2 (27:04):
Now.
Speaker 3 (27:05):
Very high cost of capital will slow things down, but
I think we're already have seen peak interest rates here
in the United States, and as those rates start coming down,
I think cost of financing won't be an issue. Where
there's a real challenge when it comes to capital is
(27:26):
for low and middle income countries. The cost of capital
in low and middle income countries. You know, if you
are in sub Srian Africa or countries in Southeast Asia,
you're looking at ten fifteen to twenty percent cost of
financing in order to build a solar plant or to
build wind that's simply too high for the pace of
(27:49):
the buildout that's required. And so I think when we
talk about the financial elements of all of this. We
should have a much clearer focus now in low and
middle income countries, and that's why I'm a big believer.
What I've done my doctoral research on is the role
(28:10):
of development finance institutions, both institutions like the World Bank
and the African Development Bank, but also national development banks
as a way to provide long term, low cost financing
to low and middle income countries to allow them to
be able to make major investment pushes. So that's what
(28:30):
I would say in that regard when it comes to
the financial parts of this. But when you talk to
project developers in the high income world today, they really
don't see access to capital as the stumbling block that
it used to be. The stumbling blocks are more things
which are in some ways Chris even thornier, like what
(28:51):
we discussed earlier, the grids, or human capital and workforce issues,
or these local domestic requirements for manufacturing to build to
build out projects. Those are the real issues that might
slow this whole story down. But I think one should
be optimistic in that regard as well, because I can
(29:12):
tell you on grids, for example, up until a year ago,
nobody really talked about the grids, right, it wasn't even
on people's energy developers certainly talked about it, but in
the larger mainstream financial and business worlds it wasn't an
agenda topic. Now when we write about this, or today
we hosted a call with the International Energy Agency and
(29:33):
their work on grids. We get more clients listening to
those calls than anything else that we do. So people
are waking up to those issues, and I think that's
a good thing.
Speaker 1 (29:43):
Yeah, And I think when it comes to the grid,
we've seen a lot of different ways that the grids
are getting improved, not just in terms of hardening the grids,
but then also the connectivity and trying to modernize them
and get them up and running so that more transmission
can go through it from other sources. So we're obviously
making strides. But yeah, like you said a few years ago,
(30:05):
it wasn't even on a second thought maybe to say
that's right now. You kind of mentioned the transition instruments
in Japan. But you know, my focus is on bonds,
so I'd be remiss not to ask you your thoughts
on the green finance and markets in terms of you know,
green social sustainability, bonds, what do you think of the market?
(30:26):
Does it have staying power? And then the other part
was going to be what other instruments do you see?
And I was going to allude to the fact like
transition bonds are now a thing again in Japan, but also,
you know, blue bonds were thrown around a little bit
for a while, and some other debt for nature swaps.
So any thoughts on other types of financing or green financing.
Speaker 3 (30:48):
It's a really wonderful question. Do we need a separate
bucket of green finance in a world that is greening?
I mean, it's a really interesting debate, and there are
two sides to this.
Speaker 2 (31:05):
Argument. Like everything right, I think that the.
Speaker 3 (31:09):
Whole green finance world did a wonderful job in terms
of socializing the idea of large scale investment in low
carbon technology. I think the amount of money that was
capitalized through the debt markets, through green instruments, it'll go
(31:30):
down in history as being transformational, not just the amount
of investments that happened, but I think, more importantly, Chris,
the opening of investors and issuers' minds to the importance
of these topics. That said, we're now at a stage
where I think standard plane vanilla. Green bonds mean less
(31:53):
and less and less, and you're seeing that in the pricing.
As you know better than I do. Can issuers raise
capital more cheaply today by issuing a green bond? It's
not quite clear anymore in the numbers rights that greenium
has sort of gone away. And is that a good
thing or a bad thing?
Speaker 2 (32:12):
Again?
Speaker 3 (32:13):
We can all discuss and debate, But like anything in finance,
there's innovation. And where I think that innovation is happening.
Where I'm very excited about is what's.
Speaker 2 (32:22):
Happening in Japan.
Speaker 3 (32:24):
Japan's g X Plan, which was announced last year, is
a huge deal. By the way, Chris and most people
who follow the energy transition don't spend enough time studying
the size and the scale of what the Prime Minister
has put out. Just to put the numbers clearly, this
(32:46):
GX Plan is a one hundred and fifty trillion yen
investment program over the next ten years, okay, or investment ambition. Now,
if you do the math, that's around a trillion dollars
over the next ten years, or one hundred billion dollars
on average per year for the next ten years. One
(33:08):
hundred million dollars on a four trillion dollar economy, which
is roughly the size of the Japanese economy, would be
the equivalent of a five hundred billion dollar a year
investment program in the United States on our twenty trillion
dollar economy. So this is big. We're talking about big
money here. Massive. Now, will that ambition actually be met,
(33:28):
will we actually get to that? There are huge question
marks around that, but the scale of theission is important.
So that's point number one. Point number two is the
financial mechanism that the Japanese government is trying to use
in order to spur this investment is the so called
transition bonds. And over the next few weeks, Japan is
(33:49):
going to issue sovereign transition bonds that the use of proceeds,
by the way, Chris, are going to go into things
that the pure green crowd may not love. It's going
to go into things like carbon capture and sequestration and
you know, green ammonia and hydrogen and all of these
(34:13):
sort of And I haven't seen nuclear, but it wouldn't
surprise me all these things which the green crowd is says, well,
I don't know is that green?
Speaker 2 (34:23):
Is that not green?
Speaker 3 (34:24):
But I think the Japanese government has been very practical, says, look,
we are an industrial economy and for us, we need
to be investing in a transition. And this transition is
multi decades, and it means that we're going to invest
in things that you may not love from a pure
green perspective, but are things that we are going to
find important.
Speaker 2 (34:44):
What's important to also.
Speaker 3 (34:45):
Note about how these bonds will be paid back is
that there's going to be a significant carbon pricing and
carbon market set up in Japan as a way to
fund these bonds. And that's another part of the financial
picture when it comes to energy transition and green finance
(35:06):
that I think we should discuss at some point, which
is whether carbon markets will play an important role in
all of this. And I think Japan is going to
give us a lot of real life examples over the
next five years on how big these carbon markets can get.
So I'm very interested in what's happening there on the
(35:28):
transition side. I think the more plain vanilla stuff, I
think that will probably continue, but it will get will
be less of the most exciting parts of green finance
going forward.
Speaker 1 (35:40):
Yeah, very good points. And one other question that I
had planned to bring up to in terms of, you know,
a more unified carbon pricing model, you know, I mean,
does something have to come out of one of the cops,
you know, where the world decides, Okay, we're going to
price carbon the same type of thing so that everybody's
on a level playing filament. That'd be a very interesting approach.
(36:03):
I doubt it happens, obviously, but you know, we do.
We need some kind of better pricing model or some
kind of better carbon taxation model. What are your thoughts?
Speaker 3 (36:13):
You're a dreamer, Chris, and that's what why I like
you so much, look like, I think that anyone who's
been around the climate discussions for the past few decades
know that this is probably the one area everyone agrees
on that we need to internalize this externality, which is
(36:35):
that the damages that we are caused by emitting CO
two and other greenhouse gases are not paid for by anyone,
and we have to start paying those costs. And there
are many ways to do that, and there are many
different mechanisms, but at a basic point, I think that's
all quite well understood.
Speaker 2 (36:53):
In globally. Now.
Speaker 3 (36:56):
I don't have the number exactly off the top of
my head. But world the World Bank keeps this database,
and I think we're at around twenty to twenty five
percent of global CO two emissions are under some form
of carbon pricing. That is up from less than ten
percent ten years ago. So you've seen a larger and
(37:16):
larger percentage of global emissions are under some type of
carbon pricing. But the weighted average price per ton of
CO two globally is around five dollars a ton. That
number needs to be more like fifty to one hundred
and fifty for this to be meaningful. To answer your question,
do I see anything like a global carbon price or
(37:39):
carbon tax ever being established. No, that said, one of
these sort of sleeper issues out there, sleeper topics that
is sort of an indirect way of getting at a
global carbon price or global carbon pricing mechanism. Are these
carbon border adjustment mechanisms, these z bams. And Europe has
(38:03):
actually already begun implementing its carbon border adjustment mechanism. And I,
as you know, spend a lot of time in Washington
talking to folks from across the aisle and from all
the different political parties and political persuasions, and it seems
like there's also growing bipartisan support and interest around some
(38:26):
type of carbon border adjustment mechanism here in the United States,
and that is a way of starting to put global
prices using national frameworks. Now you might have then competing
carbon pricing mechanisms. You know, let's imagine the US has
a carbon border adjustment mechanism one day and we are
(38:47):
importing stuff from China, which has its own emissions trading
system and its own carbon price. How those two will
speak to one another is a complicated question, but I
think you know, long story short, is that to answer
your question, yes, carbon pricing is absolutely needed. Number two
is there will not be a global carbon price. But
(39:09):
number three is that we're starting to see the beginnings
of these mechanisms, and all of us in the business
and financial world should follow this closely because it could
be an indirect way of getting there.
Speaker 1 (39:21):
Great excellent. I think those are some really excellent points,
especially how Europe, as you said with the border tax
is you know, they're thinking about it, they're looking at it,
and we're trying so I think it's all all positive obviously.
You know, I saw an interview you did recently coming
out of COP twenty eight where you were feeling pretty positive.
(39:44):
As we're kind of running a little short on time.
Are you still feeling pretty positive in terms of the
steps that we're taking climate change, we're attacking it in
the right way, or do you still think this is
a very long, arduous process that we're nowhere near solvin.
Speaker 3 (40:00):
I would say both. What's the optimistic story. The optimistic
story is that we are investing more in low carbon
tech than ever before. The optimistic story is that central
banks around the world are thinking about climate change in
a serious way. Unlike in the past, Credit rating agencies
(40:21):
are all now doing much more work pricing climate and
other ESG issues. Every single corporate executive I meet, every
single investment firm that I engage with, which is basically
every investment firm in the world has smart, sophisticated, thoughtful
people looking at both the risks and the opportunities of
(40:42):
this issue. The optimistic story is also what the International
Energy Agency itself has said, which is, we have already
shaved off one degree celsius of where we thought the
world would get to by twenty one hundred from twenty
fifteen to today, just eight years, we have already taken off
(41:03):
a degree plus because of the rapid expansion of renewables,
a lot of it was policy enabled. So that's all
the optimistic story, and that's real. That's not fake, that's
not fake news. This is real investments and real changes
in mindset, and I think that's very important. The thing
that keeps me up at night when it comes to
(41:24):
the energy transition is number one, and Bloomberg has actually
done a very good job writing about this, so kudos
to all of you. Is the whole notion of tipping points,
that the climate system could have some non linear, irreversible
change as we start warming up. And once the toothpaste
(41:48):
is out of the tube in that regard, it's pretty
much impossible to put the toothpaste back in. And there's
some wonderful academics we follow the work of Professor Tim
Lenton at the University of Exeter and others, but that
have outlined when these tipping points may be hit, what
the damages could be, and so on, and we're getting
(42:10):
really close to that. So the first thing that worries
me a little bit is the time just sort of
runs out and we could be getting there sooner than
any of us would like. And the second thing that
has me worried, is you know, I read some statistics
or I spoke about some statistics about polling data in Europe.
(42:34):
I'll give you another poll which I find really amazing
about climate change here in the United States, which is
two thirds of Americans recently pulled say that they're not
willing to spend even one dollar a month as a
surcharge to their energy bills in order to address climate change.
All right, at its very core, we're going to have
(42:59):
to pay for things that we haven't paid for in
the past. Now it might be through increased taxation, it
might be through higher borrowing costs, it might be through
a carbon price. And in the short term, the energy transition,
I believe is inflationary. Over the long term, it is
deflationary because you are going to have very cheap energy,
(43:22):
very renewable energy, as opposed to all the volatile prices
that come from fossil fuels. But upfront costs and upfront
investments are significant. And I'm worried if that message.
Speaker 2 (43:34):
Isn't made clear to voters.
Speaker 3 (43:37):
Then in a year where by our account, they are
over eighty elections this year, four billion people, or I
should say citizens of countries with total population of four
billion people will go to the ballot this year in
order to vote for their heads of state and their
(43:58):
municipal and congressional leaders. If this whole agenda doesn't get
support at the ballot box, we could start seeing a
decline of interest. And we should not forget that a
lot of the energy transition progress that we've made has
been because of policy, and that policy can be reversed.
(44:18):
And that's this thing that also keeps me up at
night and something that we're going to be studying very
closely in our work at Jeffres.
Speaker 1 (44:25):
That's excellent. I really appreciate you taking the time to
chat with us today. I mean, I thought we had
a very in depth and thoughtful discussion. Obviously, if people
have any questions or comments regarding any of the content
of this podcast, I could reach out to us directly
and we could get back to you. But Antiquette, thank
(44:46):
you very.
Speaker 2 (44:46):
Much, thanks for having me great chatting with you.
Speaker 1 (44:48):
Thank you, and I'd also like to thank all of
our listeners for joining. You can find more information on
climate investments, carbon markets, and a whole array of other
topics by going to BI ESG, The Bloomberg terminal, which
will open up to our Bloomberg Intelligence Research Dashboard. If
you have any ESG quandary or burning questions you would
like to ask BI experts, please send us an email
(45:11):
at ESG Currents at bloomberg dot net
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