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The 3D Reset: How decarbonization is shaping the future of the global economy

As the world transitions from fossil fuels to cleaner energy sources, investors are forced to rethink their approach. We explore the economic implications of decarbonization, including the costs of innovation and scaling up clean energy technologies, the issue of mineral and rare metal scarcity, and the role of government policies in driving inflation

06-26-2023
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Major shifts in three areas decarbonization, demographics and deglobalization are defining the future of the global economy and forcing investors to rethink their approach. We call this “The 3D Reset.” Understanding each of the three Ds and their implications is key to figuring out what comes next. These three trends are the decoder ring in your cereal box that will help make sense of the market in the coming years.

This piece delves into decarbonization. We are in the midst of a transition from an overwhelming reliance on fossil fuels to greener energy sources. From an economic perspective, this change will be expensive and drive inflationary tendencies, particularly given the overwhelming investment needed to bring crucial innovation to scale. Who knew that cutting the carbon out of our daily lives could be pricey?

Many countries agree that a shift from carbon-intensive forms of energy to cleaner forms of power generation is necessary in order to mitigate climate change. This multilateral push has gathered momentum in the years since 2015’s Paris Agreement; subsequently, more and more countries have committed to the goal of achieving net zero greenhouse gas emissions by 2050. And with COP 28 (the UN’s Climate Change Conference) approaching in November, there is already added pressure to show real progress on these promises especially as consumers around the world are doing their part by buying electric vehicles and investing in solar energy at home.

Now, the tangible steps that turn aspiration into reality are costly. Investment is needed to foster the experimentation and exploration that encourage technological innovation. These eureka moments such as those that have turned the sun’s rays into usable energy or successfully captured CO2 from the atmosphere and their consistent replication outside of the lab require time, dedication, and funding.

There’s also the challenge of bringing this technology to scale. The underlying solutions have to be widespread enough so that they cut GHG emissions and mitigate climate change in a significant way. But doing so with clean energy technologies such as wind turbines, solar panels, and advanced batteries requires a significant amount of investment to produce, install, and maintain in ways that seamlessly tie into how we live and work.

And many of these technologies are mineral and rare metal intensive. And with only so much of those to go around, the issue of scarcity comes into play. Companies will compete for access, and it is unlikely that supply will meet demand. This dynamic will in turn drive up the costs of these increasingly critical materials.

Finally, governments around the globe will have a crucial part in facilitating these changes; for what it’s worth, they are the parties who made the national commitments in previous international fora. But in pursuing these pledges, fueling inflationary forces will be hard to avoid.

In the US, policy is largely focused on increasing the supply of renewables through fiscal spending. Elsewhere, carbon pricing i.e., putting a price on polluting is a more palatable option; however, given how intertwined fossil fuels are in daily life, the short-term result will likely drive inflation upwards. In the next decade, turning off our dependence on carbon-heavy forms of energy will have to be a gradual transition rather than a hard shift.

So what to do about it as an investor? First and foremost and we know we are a broken record diversify. Diversify, diversify, diversify. But second, look to commodities as a valuable hedge. We’ve talked above about minerals and rare metals; now might be the time to get invested.

There you have it a brief rundown of what decarbonization is and what it potentially means for the global economy. The aims are admirable, but there’s a real economic cost to be borne. And how those costs are addressed will play a massive role in shaping the future.

The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.

Topics

Regime shift
3D Reset
Decarbonisation
Deglobalisation
Energy transition
Inflation
Market views
Global

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