Decarbonization: The Race to Zero Emissions

Insights from Morgan Stanley Research

04/01/21

Summary: These five emerging technologies could curb carbon emissions, halt climate change, and offer new ways to invest in earth’s future.

As glaciers retreat, sea levels rise, and temperatures increase, it’s clear that climate change is well underway, due in large part to the ever-increasing amounts of CO2 in the earth’s atmosphere.

The question, then, is how to best mitigate carbon emissions, which have now reached some of the highest levels in history.

A cross-team collaboration of more than 50 Morgan Stanley economists, analysts, and strategists estimates that reducing energy-related carbon emissions—the largest segment of CO2 emissions—is indeed possible utilizing five decarbonization technologies: renewables, electric vehicles, hydrogen, carbon capture and storage (CCS), and biofuels.

“The economic costs to decarbonize are substantial. But clear opportunities to reduce emissions exist and the benefit to choosing the right path could also mean significant returns on investment,” says Jessica Alsford, Head of Sustainability Research for Morgan Stanley.

Energy-related emissions account for ~60% of Global Carbon Emissions

Source: International Energy Agency, Intergovernmental Panel on Climate Change


The race to net zero

Simply put, “net zero” is an equilibrium achieved when the amount of greenhouse gas emissions that humans create is offset by the amount of carbon removed from the atmosphere, producing a balance between emissions and decarbonization. Getting there won’t be easy—net zero emissions will require $50 trillion in investment by 2050—but accelerating the adoption of decarbonization technologies could remove 25 gigatons (Gt) of carbon emissions annually by 2050.

The mandate for carbon-mitigating tech will undoubtedly require a massive government investment in related private companies. But governments alone will not be able to fund development of these technologies. Investors are increasingly directing capital toward companies developing low-carbon technology and green business models.

Chart - An opportunity exists to generate attactive returns on the required investment

Note: ROCE achieved by the companies within each sector. Morgan Stanley Bluepaper, “Decarbonization: The Race to Net Zero," October 21, 2019.


  1. A shift to renewables

    Since power generation emissions are the lion’s share of energy-related emissions, renewable energy production—with the improving economics of wind and solar—presents a significant area of opportunity.

    With fossil fuel power generation—coal, oil, and gas—accounting for approximately 65% of electricity generation, this sector has the most potential for disruption. To reach carbon reduction targets by 2050, Morgan Stanley estimates $14 trillion in investment will be needed to create the required 12,000 gigawatts (GW) of additional renewable capacity. This means more wind and solar.

    There will also need to be significant investment in the grid. The current distribution and transmission grids that operate globally were not built with renewables in mind, so grids will eventually need improvements to ensure stability during periods of low sun or wind.
  2. Carbon capture & storage

    One third of the world’s energy still comes from legacy coal power plants. Carbon capture and storage (CCS), a process to capture carbon from power stations and industrials and store it underground, is a key incremental technology on the path to net zero emissions.

    It’s estimated that fewer than 20 coal plants are retrofitted with CCS technology. To achieve a goal of net zero emissions, more than 1,700 coal plants would have to be retrofitted with this technology, creating another avenue for investors.
  3. Biofuels take flight

    Biofuels have been around for decades and release lower levels of carbon dioxide and other emissions when consumed. Most gasoline sold at gas stations in the US already has a 10% ethanol component. Currently, biofuels are more favorable for use in road transportation, but biofuels are also technically viable for aviation and marine usage.

    Morgan Stanley estimates that roughly 4% of global transportation fuels will come from biofuels in 2030. Longer term, building sufficient biofuels capacity will likely require an investment of about $2.7 trillion by 2050.
  4. Driving EV growth

    Increasingly strict regulation and new products are driving electric vehicle (EV) penetration across Europe and China, while the US is about 5–10 years behind in terms of sales penetration rates.

    Morgan Stanley sees EV use jumping globally to 113 million by 2030 and 924 million by 2050, up from approximately 1.3 million vehicles in 2018. To fully build out the required global infrastructure to support electric vehicles—equipment manufacturers, battery components, electricity capacity and storage, and other infrastructure could require $11 trillion of capital investment through 2050.
  5. Ambitions for hydrogen

    Interest in hydrogen is a relatively recent trend, however it could be a key enabler of decarbonization across industry, mobility, and power generation beyond 2030.

    Clean hydrogen is not currently a commercial technology contributing towards decarbonization since it requires fossil fuels to produce (“blue hydrogen”). However, there is growing interest in green hydrogen which uses renewable energy to produce. The rise of green hydrogen could open a range of applications from transportation to energy storage, and help several sectors reach their decarbonization targets.

Bottom line: The race to net zero is a marathon, not a sprint. While it will take change of global proportions to reduce carbon emissions, there are opportunities for investors to participant on a smaller scale—with the potential to generate attractive returns.

 

The source of this Morgan Stanley article, Decarbonization: The Race to Zero Emissions, was originally published on November 25, 2019.

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