Green Macro Newsletter September 2024: progress on clean energy targets and job creation
Schroders’ quarterly briefing on the economic impact of climate change, the energy transition and natural capital.
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Welcome to the quarterly Green Macro Newsletter, where we present recent news, internal and external research on topics covering the economic impact of climate change, green energy transition, and natural capital.
In this newsletter we focus on recent developments in climate policy across major global economies, highlighting changes in the global clean energy sector.
In the news
China has already hit its 2030 clean energy goal
In 2020, China pledged to reach 1,200 GW of renewables power by 2030, more than double its capacity at that time. Recent data show that the country surpassed this target ahead of schedule as in August the National Energy Administration announced that total capacity of clean energy rose to an impressive 1,206 GW.
Furthermore, recent analysis from Norwegian research consultancy Rystad Energy has highlighted another important milestone. Solar and wind energy have officially surpassed coal capacity in China for the first time in history.
Our view: China, the world’s largest greenhouse gas emitter, is witnessing a crucial transformation in its energy sector, cementing its position as the global leader in renewables development. Since Covid, China has added more renewable energy than coal, setting a positive example for other coal-dependent economies. Recent policies announced by the Chinese government are set to provide further cuts in emissions, suggesting that the country’s emissions may have already reached their peak. The government plans to use technologies such as green ammonia, biomass, and carbon capture and storage at coal plants, to cut their carbon intensity by around 20% by 2025 and 50% by 2027 from the average industry levels in 2023.
How China is responding to US tariffs
China's solar panel production has surpassed global demand by a significant margin, leading to concerns about overcapacity and potentially undermining solar manufacturing in other economies. In response, countries like the US and Europe have implemented industry subsidies and penalties on Chinese solar products to support and protect their domestic manufacturing industries. To circumvent these tariffs, Chinese producers are now planning to establish factories directly in the US. According to recent analysis from the Institute for Energy Economics and Financial Analysis, a global think tank, Chinese investors are projected to beat their US counterparts in planning solar panel production capacity on American soil by 2026.
Our view: China’s leadership in clean energy manufacturing is putting pressure on domestic manufacturers in developed countries, that are struggling to compete with low-cost Chinese imports. While US manufacturers are being supported by Inflation Reduction Act (IRA) subsidies, Europe is still facing key funding decisions to establish a clean energy supply chain that is competitive and sustainable. Policymakers are likely to implement stronger policy efforts to counteract Chinese competition, particularly in Europe, where there is a potential for further rise in protectionist measures.
US grid bottlenecks provide new investment opportunities
According to recent research by Berkeley Lab, the backlog of projects for new power generation and energy storage seeking transmission connections in the US increased significantly in 2023 to approximately 2,500 gigawatts (GW). This accounts for more than twice the current US generating capacity, which is approximately 1280 GW, and is five times larger than the queue in 2010.
At the end of 2023, solar, battery storage, and wind energy projects accounted for over 95% of all active capacity in the interconnection queues, underscoring the growing interest in renewable energy technologies in the US.
Our view: The surge in demand for interconnection is a clear indication of the rising interest in developing renewable energy projects. As a result, there is a pressing need to update and expand power grids, construct additional transmission lines, invest in innovative transmission technologies. Investment in transmission infrastructure will be critical for the US to move to net zero. Investors are set to play a pivotal role in providing capital for energy transmission and storage initiatives. Princeton University estimates that, in a scenario where 100% of power is derived from renewables, more than $3.5 trillion in transmission capacity would be necessary by 2050. Policy intervention is also essential. State and regional authorities will need to streamline the permitting process for high-voltage transmission lines to accelerate the deployment of critical infrastructure.
Britain’s new Labour government shows strong commitment to clean energy
The Labour party has pledged to make Britain a clean energy superpower by 2030, with the goal of achieving zero-carbon power within the same timeframe. Specifically, their plans include doubling the country’s onshore wind capacity, quadrupling offshore wind capacity, and tripling solar capacity by 2030.
In line with their strategy, the newly elected government has taken significant first steps in its renewable energy policy, lifting a nine-year moratorium on new onshore windfarms. In addition, the latest renewable energy auction, the sixth of its kind, has spurred significant interest from clean energy developers. A total of 131 projects have been signed with developers, marking a clear contrast to the previous year's auction, when no renewable energy projects could be finalized. The government attributes this turnaround to a 50% increase in government funding recently announced.
Our view: Merely two months into their term, the Labour party has already demonstrated a strong commitment to renewable energy through clear signals. The new projects have the potential to deliver approximately 3GW of solar energy, 3.5GW of additional offshore wind capacity, and 1 GW of onshore wind. However, these additions are not enough to meet the clean energy targets, suggesting that higher policy efforts are needed to fulfil their clean energy pledges. It is remarkable that this is happening as the UK becomes the first G7 country to cease coal usage for electricity generation, with its last coal power plant closing on 30th September.
Clean energy jobs are on strong path in the US
The latest report from the US Department of Energy (DOE) finds that in 2023 jobs in clean energy grew at more than twice the rate of the strong overall US labour market. Clean energy jobs rose 4.2% y/y, more than double the rate of job growth in the rest of the economy (2.0%), adding 142,000 new jobs. Solar and wind were the industries recording the strongest jobs growth, at 5.3% and in 4.5%, respectively.
The report also highlights a significant spill-over effect onto other sectors of the economy, including the construction sector. This is because companies are expanding factories nationwide to produce clean energy technologies, such as batteries for electric vehicles and grid storage. Energy-related construction employment grew by 90,000 jobs, grew at almost twice the rate (4.5%) of otherwise robust construction industry growth (2.3%).
Our view: This substantial growth in clean energy jobs can be largely attributed to the IRA tax incentives that are spurring significant investment in clean energy supply chains. The latest developments in the labour market are important as they ease concerns that the energy transition may disrupt the labour market and entail job losses. The data presents strong evidence that transitioning to a cleaner energy system not only creates employment opportunities and economic advantages within the energy sector but also generates positive spill-over effects across various sectors of the economy.
Our economic sustainability publications
Five market-moving sustainability risks with potential to impact now – August 2024
- Financial markets tend to view climate-related risks as long-term. But there are several factors that can impact portfolios within the coming few years – even months.
The most important risk investors should be watching is extreme temperatures and how they are disrupting economic activity. Climate-flation is likely to be an important investment theme.
Metals protectionism is another key investment theme as policy intervention on export restrictions and tariffs move could pose a significant challenge to the global energy transition by disrupting supply chains and increasing costs.
External economic sustainability research
Climate risk, bank lending and monetary policy – ECB
- Analysis from the ECB on data for all euro-area banks and carbon emission data finds euro area banks price climate risk when lending funds to firms. Higher interest rates are charged to firms responsible for higher carbon emission. Companies that emitted the most carbon were paying rates about 0.14 percentage points higher than those charged to the ones emitting the least.
They find that banks in the euro area also differentiate their lending rates based on future carbon emissions, not just their current ones, charging lower rates to firms that commit to reducing their emissions in the future. The data shows that firms that have not announced an emission target are charged 20 basis points more than firms committed to emissions reduction.
Their findings also suggest that monetary policy can influence the energy transition. Unexpected increases in the ECB’s policy rate are associated with an increase in the climate risk premium charged to high-emission companies, tightening financing conditions comparatively less for firms that are greener.
- In a bid to enhance their energy security, both Europe and the US have witnessed a resurgence of industrial policy in the past couple of years, aimed at fostering investment in clean energy technologies. Europe has implemented the Net Zero Industry Act, while the US has introduced the IRA. The analysis finds that the EU leads the US in the overall deployment of both solar PV and wind capacity. By the end of 2023, 257 GW of solar PV and 208 GW of wind were connected to grids in the EU, compared to 136 GW of solar PV and 154 GW of wind in the US.
In terms of manufacturing, the analysis finds significant growth over the past three years, with Europe leading in wind, and electrolyser used in the production of green hydrogen. The US is instead leading in solar modules and battery cells manufacturing.
In the upcoming months, there will be significant attention on the development of industrial and trade policy measures following the elections in Europe and the US. It is crucial to monitor if there will be policy changes and how these may impact clean technologies and new investment opportunities.
What’s coming up
US elections and climate policy
As vice president, Kamala Harris has played a crucial role by casting the tie-breaking vote to pass the IRA climate bill. In contrast, during his campaign, Trump has emphasized an expansion of fossil fuel production.
Since the passage of the IRA in August 2021, more than 50% of new jobs and capital expenditure have been announced in Republican-leaning states compared to 20% in Democrat-leaning states. These are strong incentives to keep the green subsidies alive, indicating that a change in power is not likely to derail the US energy transition. There are too many underlying economic reasons and the benefits spread too broad to change course.
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