Private Sector Is Ready to Bet Trillions on a Carbon-Free Future

"The world needs $4 trillion a year to transition to a carbon-free economy.

Sound like a lot? It's not.

Every year, the global financial system channels trillions of dollars from people who have capital to people who need it without breaking a sweat. Doing the same to achieve net-zero carbon emissions by 2050 is well within its means. It just needs something to invest in.

As Bank of America Chief Executive Brian Moynihan says: "If there's a revenue stream, then the funding is infinite."

That Wall Street's interest in sustainable finance is motivated by profit isn't good or bad, it's necessary. Converting a massive chunk of the economy's installed capital from fossil fuels to renewables cannot be achieved through public works or acts of charity.

"Government doesn't have the money, it has to come from the private sector," Mr. Moynihan says in an interview. "The role of government is to create revenue streams or demand signals or even mandates that open up the markets so that the money comes in."

Mr. Moynihan is worth listening to both because his bank has a sizable stake in the transition, and because he makes his case in methodical, bankerly language, devoid of the alarmist, mission-driven rhetoric that permeates the climate debate. His bottom line is surprising, and encouraging. First, the sums involved aren't that large when properly scaled. As Mr. Moynihan says more than once: "It's not that much money." Second, while government action is key, the private sector through its own commitments to net zero can create the revenue streams needed to mobilize capital.

Start with that $4 trillion figure. It's how much the world must invest annually from 2026 to 2030 in low carbon energy, efficiency and carbon removal to reach net-zero emissions by 2050, according to a report last month by the International Energy Agency. When scaled against expected global gross domestic product, that $4 trillion is a much less intimidating 2% to 3% of GDP. Subtract what the world already invests in energy and will no longer invest in fossil fuels, and the new investment drops further, to around 1% to 2%.

For the U.S., the net increase in investment is around 1%. That's a lot but hardly unprecedented. Business and government already invest about 17% of GDP. In the 1850s, railroad investment averaged 2% of GDP. The internet-technology boom of the late 1990s and the housing boom of the mid-2000s both raised investment by 1% of GDP. All were enthusiastically financed by Wall Street.

This spending isn't a cost, like fighting a war, but investment in the true sense: It yields a quantifiable stream of future benefits. Under the IEA's scenario, those benefits come in the form of the world spending 2% of GDP less on energy by 2050, and annual household energy bills in rich countries falling about $1,000.

Now for the caveats. The IEA engineered this scenario -- a "narrow but achievable road map" -- to hit net zero and thus assumes a lot of things go just right. Most important, it counts on the deployment of technologies that right now are only at prototype or demonstration stage, such as hydrogen-based steel production and carbon capture and storage in cement.

New technology adoption requires a "flywheel" of falling costs spurring higher demand, making manufacturing economies of scale and innovation possible, driving costs even lower. In the IEA's scenario, new technologies will have to reach commercial viability 20% to 40% faster than in the past -- a very tall order.

To start this flywheel, governments have to put thumbs on the scale. Thanks to tax credits and preferential tariffs, wind and utility-scale solar power have expanded dramatically since 2009 and costs have fallen 72% and 90%, respectively, according to Lazard, an investment bank. Unsubsidized, they are now cheaper than coal and almost as cheap as natural gas.

A price on carbon would help immensely, and mandates, such as requiring a gradual phaseout of fossil fuels by utilities, would be almost as good. Both are politically hard; Democrats rejected both in the bill implementing President Biden's agenda. But Mr. Moynihan thinks private mandates can accomplish plenty: "The big change in the last five years is the net zero commitments which create demand around the private sector companies. That will then bring money that is, across the board, huge."

Sustainable aviation fuel (SAF), made from crops and food waste such as cooking oil, has a much lower carbon footprint than jet fuel but costs three times as much. As a result demand is minuscule and because demand is minuscule, so is investment in production and the cost differential remains wide.

Mr. Moynihan says a mandate requiring airlines to use a certain percentage of SAF would instantly open the floodgates to investment: "We can finance the plant build-out. And as you scale up, that price differential will come in."

Last summer, Mr. Moynihan and other members of a business coalition organized by Britain's Prince Charles urged leaders of the seven major industrial nations to endorse a 10% SAF mandate, without success. In the meantime, though, Bank of America is buying SAF for its own aircraft and employee travel, and is one of 60 companies that, under the auspices of the World Economic Forum, have targeted 10% SAF by 2030. Airlines for America, which represents U.S. airlines, is also working toward a goal of about 10%. Bank of America and American Airlines Group Inc. are among the anchor partners in Breakthrough Energy Catalyst, a program led by Bill Gates to invest in four early-stage low-carbon technologies, including SAF.

Bank of America is willing to increase operating costs to go carbon neutral, Mr. Moynihan says. If every major company did the same, the resulting demand would be game-changing.” [1]

1. U.S. News -- Capital Account: Private Sector Is Ready to Bet Trillions on a Carbon-Free Future
Ip, Greg.  Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 05 Nov 2021: A.2.