While immense benefits of net zero carbon looks juicy businesses have a daunting task ahead of them. Their job looks complex and tricky primarily because the policy and technology ecosystem is struggling to balance demand and supply challenges.
Anvesha Thakker at KPMG IMPACT puts it succinctly, “Net-Zero pathways will require businesses to consider both demand side as well as supply side measures. In this journey, decarbonization technologies such as renewable energy, demand electrification, CCUS (carbon capture, utilization and storage), hydrogen, biofuels (and others) may compete but will also complement with the right ecosystem enablers. Businesses will need to manage this interplay while considering the alignment of their investment horizons with the maturity curves of various technologies. They may also need to hedge their bets across technological spectrum. Government has to facilitate this journey through right policy and fiscal measures.”
While the central and state governments have been aggressive, especially in promoting renewable energy, they are struggling to align the interests of all the stakeholders. Policy ambiguity, slow response to changing tech environment and reluctance to take politically-difficult decisions are hampering the speed of India’s march to net-zero carbon economy.
KPMG has captured the challenges in its report titled ‘Decarbonizing growth – Managing the transition’ eloquently. The report highlights the importance for businesses to identify their strategies and portfolios of technologies to meet their respective net zero targets. It discusses the imperatives of a system perspective that incorporates energy demand management, improving energy efficiency and increasing the share of clean energy in the overall energy mix.
Santhosh Jayaram, also with KPMG, notes, “The price of carbon will have to be internalized and is no longer an externality. It dwells into potential technological roadmaps in the journey. It concludes with the emphasis that all actors have a role to play in achieving the outcome.”
Key highlights
- The transition to a sustainable future, characterized by “Net Zero” is inevitable and beginning to reverberate both upstream as well as downstream owing to globally integrated supply chains
- Large global corporations have started to urge their suppliers to reduce their carbon footprint as part of their own decarbonization strategy, which is likely to result in a domino impact on smaller nations and companies
- Harder to abate sectors are also taking bolder steps to tackle the climate agenda
- More private sector commitments are coming in and sectoral decarbonization discussions are picking up
- Decarbonization technologies are fast gaining ground. Sector specific measures on the demand side and energy efficiency will continue to see impact and largely align with investment and retrofit cycles. CCUS (Carbon capture, utilization and storage) and hydrogen will co-exist to play a key balancing role in hard to decarbonize sectors with impact felt post 2030
- Electrification of end use sectors such as transport and industries will need to be supported by massive adoption of RE and its integration will require both batteries and hydrogen to come in based on application required (ranging from frequency response, to seasonal storage)
- CCUS will find a strong focus in decarbonization of industrial sectors especially hard to abate sectors for capture of emissions and deployment in blue hydrogen production
- Green hydrogen may cannibalize some of the growth of CCUS but may co-exist as hydrogen will not be able to cater to all industrial processes
- Government, financiers, industry, consumers will need to act together to make the transition happen
- The eco-system comprising of policy, technology, market, investments, standards and society has to work together in a complementary manner in this transition journey
- The option of cross-boundary collaborations and market mechanisms will have to be evolved even in the current geo-political dynamics as world trade is still dispersed around the globe
- Universally acceptable standards to measure and navigate the journey are important to ensure transparency and accountability. Standards also will help in benchmarking and monitoring of progress
- Corporates need to assess the full impact of climate risk including physical as well as transitional risk and make implementable strategies to move towards net- zero
- Businesses are increasingly acknowledging that decarbonization may entail a fundamental transformation in business portfolio
- Corporates are looking to decarbonize not only their businesses but their wider supply chain
- Harder to abate sectors are also taking bolder steps to tackle the climate agenda – The biggest hurdles in achieving meaningful decarbonization may yet be faced by harder-to-abate industries such steel, cement, aviation, shipping, etc.
Financial Impact
Transition to net-zero will require a significant transformation across the organization with massive reallocation of capital which is likely to create unprecedented challenges.
- Vision and targets: Businesses need to appreciate the deep financial impact of climate risks and make climate change their pressing agenda with clear vision and targets
- Business portfolio diversification will need to be a key part of business strategy, especially in the energy sector where a substantial part of the emissions comes from the use of the products
- Supply chain: Companies need to look beyond their emissions to the wider supply chain. It is imperative that companies work with stakeholders across its value chain to incentivize them to introduce green interventions at every step
- Technology: Businesses will need to evaluate and plan their technological pathways to decarbonization. As the digital revolution catches up with the sector, boundaries will blur with new areas of competition. Businesses will have no choice but to anticipate and plan for a change in their business models.
- Structure: There have to be radically altered organizational arrangements that align to the business imperatives arising from climate change and the need for a deep focus on innovation and agility
- ESG: ESG is no longer a matter of mere compliance. ESG has taken a centerstage in the energy transition/ decarbonization process and a critical link between financing and ESG that has emerged
Technology Challenge
- The four dominant clean energy technology pathways
- Electrification of end use sectors
- Carbon capture, utilization and storage (CCUS) will be a crucial enabler for achieving net-zero – CCUS is a critical technology for decarbonizing hard-to-abate sectors (for instance, steel, cement) and is one of the few technologies that can abate emissions from fossil fuel-based power generation – while renewable energy adoption is planned in a big way, it may not completely usurp the stranglehold of coal and gas-based power plants for many decades
- Hydrogen is expected to play a key role as an energy vector in the on-going energy transition – Green hydrogen will help decarbonize hard to decarbonize energy consuming sectors such as transport and industries through sector coupling
- Bioenergy: Use of biofuels in transport applications is expected to show the strongest growth and is expected to play an important role in decarbonization of some hard-to-abate sectors such as shipping, aviation, heavy transport. Technologies for generating biofuels from industrial waste have been generating significant interest and these transcend the limitation of availability of organic biomass
Companies need to select and back R&D efforts required for bringing technologies to market based on investment cycles
See full report: https://home.kpmg/in/en/home/insights/2020/11/enrich-2020-the-net-zero-future.html
