16 August 2023 10 minute read
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Rapid changes in the global economy could tip some sectors into low-carbon phases faster than incumbents expect, with important investment implications.

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Read this article to understand:

  • How systems thinking can identify tipping points
  • How changes in energy, transport and food could radically reduce carbon emissions
  • Super-leverage points that could be the target of intervention by policymakers

Given all the focus on the breakdown of political order, cost-of-living crises and assorted environmental challenges, it can be easy to forget how much the real economy is changing. In some areas, nascent technologies are displacing incumbents fast in a major boost for those seeking to decarbonise.  

Technological disruption tends to start slowly then accelerate as they become cost-competitive

For economic historians, this is not a surprise. Technological disruption tends to start slowly then accelerate as new approaches become cost-competitive and ultimately cheaper than existing ones.

Many factors influence the pace of change, from hard limits on materials and ecosystem services to access to finance and social norms. The question then is: could policymakers and investors use their understanding of underlying processes to drive change faster, and get on the right side of it?

To find out more, we spoke to Professor Tim Lenton, founding director of the Global Systems Institute at the University of Exeter. As well as monitoring environmental tipping points, they are using a complex systems approach to look at the flipside: how to identify systems on the cusp of tipping to new, more efficient, lower-carbon states.

We also hear from Nick Molho, Aviva Investors’ head of climate policy, on actions needed to accelerate the transition and get capital flowing into priority areas of the economy.

What do we know about climate and technological tipping points?

The climate system is on the cusp of major tipping points that could bring all kinds of unexpected, non-linear reactions. Given the policy backdrop, there is a lot of uncertainty about the outcomes; we need to accelerate efforts to decarbonise the global economy to make change about five times faster.1

To do this, we need to identify and trigger positive tipping points with strong feedback loops to force the system into a state of self-propelling change. The social elements are critical. The more we make something, the better we get and the cheaper each unit becomes. From the case studies we have, there are already examples of this taking place.

Technological reinforcement is part of the mix

Technological reinforcement is part of the mix. When a new technology emerges, innovation happens around it and other technologies appear that make it more useful. For example, there is no point having an electric car without an effective charging network and vice versa. To understand an entire system and its likelihood of tipping, we need to look closely at the main actors and what actions could bring the tipping about.

We have an interesting example in Norway, which has tipped towards battery electric vehicles (EVs) in the last ten years in an extraordinarily rapid transition, thanks to progressive tax policies (Figure 1). In Norway, it costs about the same to buy an EV as a petrol or diesel vehicle, but people have been smart enough to work out EVs are cheaper to run. So, Norway has shifted to EVs through policies targeting the total cost of ownership tipping point.

Figure 1: Tipping to electric mobility in Norway (per cent)

Source: Robbie Andrew, July 2023.2

Meanwhile, the global EV fleet is growing exponentially, doubling in about one and a half years. We now have about 17 million EVs on the road, but the world has about 1.4 billion cars. If we carry on with the existing doubling time (which we probably won't), by 2030 half the world’s fleet will be battery EVs.  

Of course, there are other considerations. Some drivers may choose not to scrap their vehicles until the end of their useful life, but the data illustrates how quickly change is happening. That is a lot to do with the decline in the price of batteries through economies of scale. Even though battery prices went up in 2022 for various reasons – supply chain issues, the war in Ukraine and so on – it made no dent in the pace of growth.

What other areas could be important for tipping and accelerating decarbonisation?

Green ammonia is another area where there could be multiple reinforcing feedbacks between sectors (Figure 2).

Ammonia is the gas commonly used in fertiliser production; it is classified as green when the production processes are essentially carbon free.

Figure 2: Green ammonia and related super-leverage points 

Green ammonia and related super-leverage points

Source: Systemiq/University of Exeter GSI, 2023.

Most ammonia production today is not green because it involves steam methane reformation, where steam is used at a high temperature to split methane (usually fossil gas) into hydrogen, carbon monoxide and carbon dioxide. In a two-stage process, the hydrogen is then combined with nitrogen to form ammonia. It is very energy intensive and releases carbon.

How could we do this differently when we are producing a lot of renewable energy? There will be times when supply exceeds demand, and that excess energy can be directed to split water and create green hydrogen. Green hydrogen is one of many viable forms of energy storage to consider along with batteries if you want a 100 per cent renewable future.

Green hydrogen is one of many viable forms of energy storage to consider

If we look closely, interesting feedback loops emerge. Ammonia is used in fertiliser, but we don’t have to make fertiliser from steam methane reformation. We can use renewable energy to split water into hydrogen and oxygen and separate nitrogen from the air.

Because the price of methane has been high, green ammonia production is cost competitive with fossil-fuel fertiliser production. But by opening that market, we anticipate economies of scale. As capacity is built out, we expect the price of green hydrogen to come down enough to open a market where green ammonia could be as competitive as shipping fuel, replacing (fossil) bunker fuel. That is a larger market where it could be possible to achieve further economies of scale, bringing down the cost of green hydrogen further. 

Steel production is another energy-intensive process and significant contributor to global warming. Using hydrogen in the production of steel, to make “green steel”, could also be part of a positive tipping cascade that could reduce emissions significantly.

Another area of interest is alternative proteins, where plant-based meat substitutes are coming to market that are competitive in terms of price and quality with real meat. We see evidence of exponential growth and expect fermentation-based alternative proteins hot on its heels. Lab-cultured meat has the potential to become a viable alternative as well.

Are the three tipping points you mentioned – EVs, green ammonia and alternative proteins – the most important?

The most fundamental tipping point is the one towards renewable energy. Our report was angled towards policymakers. From that perspective, zero-emissions vehicle mandates like banning petrol and diesel cars can trigger change across the whole economy. They can drive cheaper batteries to reinforce the renewable energy transition, as well as electrify goods and so on.

If the market is close to a positive tipping point, you could get more bang for your buck

A mandate for incentives like those put forward in the US Inflation Reduction Act for green hydrogen or green ammonia could also accelerate change. The potential shift to alternative proteins would liberate the land being used inefficiently by animal husbandry. This would help enable a necessary scale-up of carbon removal and storage by the biosphere. We could have other examples; our proposals were not intended to be definitive.

What is the significance in terms of getting ahead of change?

If the market is getting close to a positive tipping point, you could get more bang for your buck as policymakers or investors. You might make a modest policy change or shift in capital at a point in the system where there is strong reinforcing feedback with the potential to start self-propelling change. If your objective is to trigger a transition, you know when a particularly well-chosen intervention or incentive could have a disproportionate outcome (see Figure 3).

It is the same for investors. You might seek options to invest in the approach that is about to surge in a period of cascading change. There are risks and opportunities. We can use complex systems theory to guide on the risk-reward.

Figure 3: Interventions to trigger positive tipping

Social innovation

Technological innovation

Social-technological-ecological innovation

Policy intervention and public investment

Private investment and markets

Public information

Behavioural nudges

Source: Aviva Investors, 2023; University of Exeter GSI, 2022.3

Taking a step back, how do you assess the change going on across all sectors?

We have been building a research community with around 300 members. We recently released a report – The Breakthrough Effect – to address evidence of positive tipping points by sector, and the interactions across and between sectors where there might be reinforcing feedbacks.

The financial sector is vital because it could cascade change across many sectors simultaneously

This work has allowed us to identify “super-leverage” points that could be targeted through interventions by policymakers or other actors. Change in these areas could accelerate transition in sectors currently generating around 70 per cent of greenhouse gas emissions. The financial sector is vital because it could cascade change across many sectors simultaneously. We plan to release more details on this cross-sectoral study near COP 28 in December.

Change processes always experience roadblocks. How would you address roadblock shocks such as those around lithium mining?

Every new technology or innovation has environmental and social consequences. The big questions are how large the disruption will be and how will we manage the implications?

Every new technology or innovation has environmental and social consequences

Using lithium or cobalt for batteries kicks off environmental and social issues, because the transition is not always being governed as well as it could be. But those concerns should be smaller in the switch to battery driven vehicles than around coal mining or fossil-fuel extraction. In absolute mass terms, the scale is orders of magnitude different. For example, around seven million deaths a year are attributed to fossil fuel-related air pollution.

Is there any point applying tipping point analysis to macroeconomic data sets?

We do not believe traditional cost-benefit analysis or conventional macroeconomic analysis is relevant because we are in a time of transformation. Nobody needs to know allocative efficiency.

We need a different kind of efficiency, which is about the most effective way to act to create change. In that spirit, we prefer to model the market and the macroeconomy as a system where actors are not perfectly rational and core assumptions are not made.

The policy view: Nick Molho, head of climate policy, Aviva Investors

Moving entire economies towards net-zero emissions is immensely complex. While change has been rapid in some sectors, there are others where low-carbon solutions are yet to be fully commercially deployable at scale (Figure 4) or policy barriers stand in the way of further investment.

What will it take to move faster towards those tipping points where momentum accelerates and becomes self-sustaining? It is going to need public policy interventions across three key buckets: cross-economy enablers, supply-side measures and demand-side interventions.

Timely intervention is essential to create the right conditions to unlock low-carbon investment opportunities and allow countries like the UK and companies to meet their net-zero targets. The buckets are considered briefly below in the context of the UK, where the pace of the net-zero transition is falling behind, according to the independent Climate Change Committee.4

Cross-economy enablers

Cross-economy policy measures or “enablers” are essential for national governments to get right because they have knock-on impacts on the ability of several, if not all, sectors to decarbonise. First off, national governments need comprehensive net-zero plans setting out policy measures to grow low-carbon investment in each sector and clearly identify how these measures will interact.

Understanding interdependencies between sectors is vital. For instance, the way in which the UK government incentivises the development of a zero-emissions power grid needs to anticipate the growth in electricity demand from sectors such as heating, surface transport and heavy industries. All rely increasingly on electricity to reduce their own emissions.     

Establishing a sufficiently high and predictable carbon price trajectory to guide low-carbon investment across sectors is another critical intervention. Recent reforms to tighten the emissions reduction trajectory and broaden the coverage of the UK Emissions Trading Scheme are important steps in the right direction.5

Another step is for governments to develop public funding strategies to crowd-in private investment in sectors where cutting emissions is particularly complex or perceived to be high risk – factors that contributed to the creation of the UK Infrastructure Bank. Targeted public investment can play a key role in de-risking and attracting private investment into areas such as low-carbon heat for buildings and first-of-a-kind low-carbon plants in heavy industries like steel, chemicals, glass, cement and ceramics.

Supply side measures

Supply side measures are essential to make new low-carbon technologies and solutions commercially viable and provide clarity about the availability of clean fuels needed for decarbonisation, for instance low-carbon hydrogen for heavy industry, ammonia for shipping, sustainable aviation fuels and so on (a super-leverage point highlighted in Figure 2).

Innovation funding coupled with market mechanisms such as feed-in tariffs, the UK’s Renewables Obligation (a scheme to encourage electricity generation from renewable sources) and contracts-for-difference (CFDs) played a key role in accelerating technological improvements, cost reductions and the roll-out of solar PV, onshore wind and offshore wind. They must be replicated for other parts of the economy.

Market mechanisms will also be critical in attracting investment in emerging low-carbon solutions as well as established areas where progress has been too slow.

In the UK, this could include fiscal incentives to drive insulation and low-carbon heat uptake in homes, grants to accelerate the penetration of EVs, and CfDs to accelerate the production and commercialisation of low-carbon hydrogen and carbon capture and storage for heavy industry. 

Demand-side measures

Engaging with the supply-side alone will not be enough to deliver change at the scale needed. This is particularly the case in sectors such as food and aviation where technological solutions alone are unlikely to lead to full decarbonisation.

In these sectors, managing or reducing demand for high-carbon goods and services will have a role to play.

A key part of unlocking investment opportunities – especially those involving significant upfront capital expenditure – is to introduce measures that will grow demand for low-carbon products, infrastructure and solutions. For instance, it is difficult to expect a steel manufacturer to commit significant capital to build a green steel plant without reassurance there will be a growing domestic or regional market for the product and that it will not have to compete with potentially cheaper and higher-carbon imports.

This is where measures such as green public procurement criteria, mandatory low-carbon product standards and carbon border adjustment measures could help create a level playing field and fuel demand for low-carbon solutions. This would provide an essential market signal to guide businesses and financial institutions.

Making these interventions in a timely way and striking the right balance between the buckets is difficult. But it is necessary if governments are to shift their economies towards net-zero emissions within the short timeframe called for by climate science, and to reap the rewards from catalysing investment in clean energy, manufacturing and transport.

Figure 4: Key sectors expected to meet low carbon tipping points this decade

Key sectors expected to meet low carbon tipping points this decade

Source: Systemiq, November 2021.6

References

  1. “Five times faster: Rethinking the science, economics and diplomacy of climate change”, Simon Sharpe, 2023.
  2. “Norway EV sales and related data”, Robbie Andrew, CICERO, July 2023.
  3. Tim Lenton, et al., “Operationalising positive tipping points towards global sustainability”, Global Sustainability, Vol. 5, E1, January 10, 2022.
  4. “Better transparency is no substitute for real delivery”, Climate Change Committee, June 28, 2023.
  5. Department for Business, Energy & Industrial Strategy and Department for Energy Security & Net Zero, “Participating in the UK ETS”, GOV.UK, April 17, 2023.
  6. “The Paris Effect – COP26 Edition: How tipping points can accelerate and deliver a prosperous net-zero economy”, Systemiq, November 2021.

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