The challenge of putting net zero pledges in practice
By Gareth Jones, Associate Partner
BP’s announcement earlier this week that it would cut its dividend for the first time in a decade prompted much comment in the business pages. This is unsurprising, given that the company is widely seen as a reliable and regular payer of dividends and many shareholders and investors have counted on the income. BP’s CEO, Bernard Looney, attributed the difficult Q2 Results to Covid disruption which supressed demand for oil, but many saw the company’s strategic overhaul and move away from hydrocarbons as more significant.
The company famously announced earlier this year that it would become net zero by 2050 “or sooner” – becoming the first oil major to make such a pledge. The rationale for this is clear, given the urgency in tackling climate change and need for the company to reinvent itself to secure its long-term future as the world shifts to cleaner energy. The challenge of delivering this, however, is sizable. In the short-term it requires the company, that still relies on oil for the majority of its income, to cut production and invest in renewables and clean energy – all while the global economy recovers from Covid-19 economic disruption.
Many energy and energy-intensive companies have made similar pledges to BP over the past few months. These pledges, however, do raise questions. For instance, what happens if shareholders no longer share the CEOs vision or trust them to deliver? What happens if the costs are seen as too great – and if short-term dividends are prioritised over long-term sustainability pledges? Ultimately, it is a question of who pays for net zero and how.
This is a challenge that is certain to be shared by businesses, industries, governments and societies across the world in the coming decades. Net zero pledges have been made over the past year or so with remarkably little dissent. This undoubtedly reflects the growing consensus among the public over the importance of tackling climate change. It also reflects the growing power of green finance in business and the value of positioning yourself as environmentally sustainable. But it also, bluntly, underlines the point that making a pledge is easy – the hard part is implementing it.
Last year, the UK legislated to reach net zero greenhouse gas emissions by 2050 and became the first major economy to do so. It was one of Theresa May’s last acts as prime minister and quickly gained cross-party consensus and was supported by her successor Boris Johnson. To date, there has been very little political opposition to this commitment – the only note of criticism came from her then (also outgoing) chancellor, Philip Hammond. This political consensus has been sustained, in part, because there has been very little debate over the details or hard choices that will be required in its implementation. Many of these details, however, will need to be addressed at some point soon.
Firstly, there are the costs involved. The Committee on Climate Change has estimated that the total costs of getting the UK to net zero would be £50bn per year. The Treasury and the Department for Business, Energy and Industrial Strategy (BEIS) put the figure at £70bn per year, or over £1 trillion by 2050. Whatever the actual figure, there will need to be an agreement on how this is paid for – through taxes, energy bills and other costs for consumers and businesses. There are wider impacts on households to consider (for instance, heating to be almost entirely decarbonised – meaning every boiler will need replacing). It will mean major changes for all key sectors of the economy – most notably transport but also among other energy intensive users.
Another thorny issue concerns what we do with stranded assets, which would include fossil fuel supplies we can no longer extract. In the UK, this could have serious impacts on economies reliant on oil production such as the North Sea. Lastly, a big issue concerns geo-politics – after all climate change requires global cooperation and there is considerable uncertainty over the current position of the world’s largest economies – the USA and China. A specific concern for the UK is what to do if other countries do not follow with similar commitments.
Some of these questions will begin to be debated more seriously in the coming months. The Chancellor, Rishi Sunak, has confirmed that the Treasury will publish an initial report into its net zero review this autumn – which will look at costs and opportunities in more detail. There will also be an Energy White Paper, setting out the policy environment for the energy transition. The Government will also need to set its position and plan for negotiations ahead of COP26 (now taking place in 2021), with the aim of securing a broader global commitment to net zero.
Such developments are bound to prompt debate and disagreement. It will therefore be important to maintain a degree of consensus and agreement as the costs and consequences of net zero become more tangible. And all those that have made net zero pledges – including businesses and governments – will need to demonstrate they are serious about reaching their target, while also ensuring that the impacts and costs of reaching them are seen as fair and equitable.