Why the path to Net Zero isn’t as straightforward as it seems — and what it means for your business strategy
Oxford Analytica (part of FiscalNote)
Leading independent geopolitical analysis and consulting firm
While the concept of net zero seems straightforward at first blush, dozens of factors can complicate or accelerate the transition path to a net-zero economy. Senior Associate Eleanor Van Buren explores why the journey to net zero may look different than initially expected and what organizations can do to address the preparedness gap.
We hope you find the insights useful. And if your organisation would like to find out more about our Strategic Issues Monitor - a bespoke service that is designed to help you monitor and analyse issues that might impact your path to net zero, easily and effectively - please book a consultation with our specialists today:
Since world leaders got together in Paris in 2015 and committed their respective nations to wind back the clock on carbon emissions, “net zero” has become a rallying cry for action on climate change. The goal is simple: the world needs to steer away from carbon-intensive energy sources towards renewable options so the level of greenhouse gases in the atmosphere does not rise any further after 2050.
To meet climate targets, corporate initiatives will be just as important as government policies. Most companies have good intentions in this respect; pledges to reach net zero are skyrocketing, with an estimated 60% of companies having committed to such targets.
But as good as these commitments are, like all plans, they’re based on certain assumptions — typically that progress will be consistent, linear and predictable. An industry such as electric utilities might envision a relatively clear path to decarbonisation, for example, which involves shifting from fossil-fuel generation to renewables and battery storage, with bridging plans in place until it is able to operate solely on renewable energy.
In reality, implementing change at this scale carries a host of risks that are often overlooked in Net Zero roadmaps.?
Case in point: the Russia-Ukraine conflict. Disrupting energy supply chains across Europe, the conflict exposed the importance of energy security. Will this development set European nations back on their journey to net zero or accelerate it? The answer isn't straightforward. But hopefully, you can see how events outside of your control can force a detour on the path to net zero, or set industries on an entirely new course.
So how do you ensure that your net zero commitments are credible when the road is paved with uncertainties?
The Push and Pull of Net Zero
When it comes to meeting net zero pledges, it is not simply a case of setting targets and letting industries work out how to achieve them. Instead, companies will be pulled along (or off) the transition path by market and technological forces. We can group these push-and-pull factors into three broad buckets, each of which has the power to pivot your transition to net zero in directions you do not currently foresee:
1. Geopolitics
The United States has great sway in how the world responds to climate change but the two major political parties have radically different visions for net zero. So far, President Joe Biden has adopted a gradual approach to replacing fossil fuels with renewable resources in the critical oil and gas sector. Will Vice President Kamala Harris, should she be elected president in November, face more pressure to boost low-carbon energy production? Our analysts certainly think so.?
Then there’s former President Donald Trump. Known for advocating a ‘Drill, Drill, Drill!’ narrative, it’s possible he may lift the pause on new Liquified Natural Gas (LNG) project approvals and reverse methane emissions regulations.?
Those are two very different futures to account for, depending on who wins the election. How do you determine where resources should be allocated when the Head of State could be steering in an opposite direction over the next four years? Who is going to win and lose in the US agenda? Can you even compare the platforms?
Meanwhile, China, the other big player in the climate conversation, seems to be hedging its bets. On one hand, it is the world’s leading manufacturer, installer and user of renewable energy. On the other, investment in coal-fired power continues apace. How will tensions between Beijing's energy sovereignty policies and net zero policies play out? Might China use its dominance to exert economic pressure on other countries?
While these are headline stories, there are more subtle trends that could affect net-zero targets. Elections, policy shifts, conflicts, coups, sanctions and trade wars are just a few of the factors that can change the direction of travel. When making long-term plans today for your organization, how do you accurately account for geopolitical disruptions in the coming years?
2. Technological Breakthroughs
Net zero plans have to fit with the science. Some of the most transformative technology breakthroughs are not yet mature enough for full-scale implementation, so there’s a risk that some planned investments could turn out to be stranded assets.
Take carbon capture and removal, for example. These technologies are used by various industries on a global scale, but it doesn't mean they’re ideal. The high cost and low scalability of current carbon-capture solutions are something that researchers are continually working on. Leaders have to stay ahead of the latest developments and understand the implications that a breakthrough may have for their organization’s net-zero goals if they are to jump on opportunities.?
Some industries are inherently hard to predict. Decarbonising steel remains a daunting challenge, for example. Initiatives on hydrogen may provide an alternative but researchers recognize that several technological routes must be explored in tandem to achieve emission targets. Which one will gain priority may depend on tax incentives and favourable regulatory frameworks as much as on the science — even the best technology cannot thrive if governments are unwilling to support its deployment. Do you know which way the wind is blowing?
3. Sector-specific challenges
Naturally, creating a credible net zero plan will mean different things for each sector. In some sectors, such as aviation and agriculture, getting emissions all the way to zero is likely to be near-impossible. These sectors will need more support and to work hand-in-hand with governments if they are to make a meaningful contribution to net-zero targets.
Cooperation comes with its own set of challenges. For example, the EU’s climate goals for 2040 hinge on the agriculture industry’s cooperation on strategies such as methane reduction. Given the mass farmers’ protests seen across Europe last year, it’s doubtful whether cooperation will come easily. Policymakers have already bowed to pressure to dilute some green deal policies affecting the sector — how far they bend remains to be seen.
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Incorporate Net Zero levers into your strategic decision-making
The fact that the road to net zero will be bumpy and fraught with push-pull forces is not an argument for sitting back and watching from the sidelines. Quite the contrary.
Approaching the challenge with a clear-headed understanding of the trends and roadblocks is essential to determining realistic pathways to net zero, not just theoretical ones. Companies that manage the transition well will have a commercial advantage. Companies that are not preparing themselves with a full risk picture may inadvertently be allocating capital in the wrong places and offering a false impression to their stakeholders.
In an era where transparency is paramount, this could be damaging to your reputation and bottom line.
To help organizations integrate net zero levers into their decision-making, Oxford Analytica has created the Strategic Issues Monitor (SIM). This bespoke monthly or quarterly monitor, tailored to your region, industry and company, helps organizations identify, assess and anticipate the key trends that could affect their path to net zero.
Drawing on our global network of 1,500 regional and sectoral experts — including academics, former government officials, private consultants, scientists and researchers — the SIM assesses the primary issues facing your organization to generate a bespoke list of trends that will shape your business environment in the years to come.
Those trends are first captured in a baseline report that serves as the foundation for monitoring. Our experts then subject each trend to forward-looking analysis, delivering regular updates so you can see how each trend is manifesting and its direction of travel. Crucially, our specialists also provide analysis of the implications for your operating environment: moving target dates, potential market distortions, the impact of policy changes, and so on.
Expert-validated, forward-looking trackers such as this give you the credible intelligence and analysis you need to advise stakeholders on the right path forward for your business and the investments that will get you there. It strengthens your company's preparedness and positions you to take fast action on the trends most likely to influence your strategies, stakeholders and investments.
Bottom line? Clinging to assumptions and hoping that the path to decarbonisation will be clear and predictable is a barrier to achieving net zero targets. Forward-looking leaders need to stay on top of developments and leverage that intelligence to make transparent, sustainable, thoughtful plans for the new world ahead.
Case study: Shifting dynamics in the global EV market?
For example, our client, a major automotive company, needed help evaluating strategic issues concerning investment and trade activities in the global electric vehicle (EV) market. It also needed a better understanding of the implications and responses from governments as a result of those activities.
We delivered a state-of-play baseline report capturing key technology trends — materials, batteries, trade relations, among others — as well as other business environment trends specific to key markets worldwide. The bespoke quarterly monitor provided horizon-scanning of events and developments relevant to the key trends, such as emerging partnerships to build out manufacturing capacity and diverging government interests within the EU.
This was a global scanning exercise and the client did not have the resources to monitor events and developments everywhere. The SIM connected the dots for them and delivered a forward-looking assessment to help our client quickly assess changes that might impact their approach to net zero over time.
Case study: Renewable energy development and deployment in Europe
Headquartered outside of Europe, this large multinational wanted an expert view to understand renewable energy and energy policy trends shaping their European operations.
Oxford Analytica’s advisory specialists generated a list of 15 trends that could affect the client strategically, including the challenges of large-scale hydrogen production within the EU, new “carbon insetting” initiatives, and the degree of policy support for EV charging infrastructure.
The baseline report served as the foundation for ongoing monitoring, which was delivered in the form of concise monthly updates showing the trajectory of trends: strengthening, weakening or staying the same. This gave our client a clear picture of how energy policy in Europe was evolving and what their strategic options were as a result — an expert view that was not readily available elsewhere. And as a result, they are able to make decisions about their European operations with more clarity and confidence.?
Would you, too, benefit from ongoing monitoring of, and expert insights into, strategic issues concerning net zero that impact your organization? Book a consultation with our advisory experts to discuss your needs and whether our bespoke Strategic Issues Monitor might be right for you: https://www.oxan.com/services/strategic-issues-monitor/
About Oxford Analytica
Founded in 1975, Oxford Analytica is a leading geopolitical analysis and consulting firm.
Drawing on a worldwide network of experts, we advise our clients on their strategies, operations, policies and investments. Our trusted global insights and seasoned judgements on global issues enable our clients to navigate complex markets.
Our flagship product, the Oxford Analytica Daily Brief?, delivers timely, impartial and actionable analysis of emerging trends and developments in the global political economy, each working day.