The ambition loop: will the interplay of business and policy lift climate action?

What is the role of business in shaping climate goals? Can they influence global targets or are policy makers better suited to do so?

Preben Munch, Senior Director of Sales & Solutions, spoke with Nigel Topping, Chair of the UK Climate Change Committee and former UN Climate Change High-Level Champion for COP26, about how the private sector can meaningfully contribute to shaping climate targets and moving the needle of climate action.

Investment decisions matter, and in such a complex and interconnected global market, policy and markets cannot operate as silos. The private and the policy sectors can push each other to achieve higher ambitions.

How has the sustainability space developed over the last couple of decades?

The development trajectory has been going from making a moral argument to making an economic and competitiveness argument. We tried to use competitiveness arguments 20 years ago, but they were harder to make because of the state of technology and sustainability solutions. Right now, I don't think there's any sector which isn't being impacted both by the risks of climate change, but also by the opportunities of an energy transition.

The Climate Change Committee, which advises the UK government and which you chair, recently released a report on the costs and benefits of carbon reduction. The conclusion was quite simple: investing in net zero is profitable. How would you position that report in a global context?

What we tried to achieve was really to try and combat egregious misinformation and show that, although the path to net zero will cost a little bit more in terms of investment over the next 25 years, it will deliver massive savings, which will then be locked in.

Our main headline is that the whole transition will cost less than one fossil fuel price spike. We don’t often think about the costs of volatility, but if you’re a fossil fuel or fertiliser user, you’re feeling it now.

These two broad conclusions are applicable to most countries, particularly the majority who are net fossil fuel importers. For them, transitioning to renewables is also the route to energy independence.

We all know that we need investments into the different solutions that will lead towards a net zero society. And the private sector is engaged. But how do we see more of it? How do we foster larger, deeper participation from the business sector in financing and positively shaping climate policy?

We have seen exponential growth of capital deployment into climate solutions in the first three months of this year. At the same time, in the power sector more than 100 percent of the growth in global demand was met by renewables. We are seeing the beginning of the structural decline of fossil fuels in the global power system.

Now, the ROI in climate solutions depends on the sector. EVs, for example, have grown exponentially. No one will buy a combustion engine car in 10 years’ time. Renewables are a similar story. The explosion of solar is incredible in countries like Pakistan and Vietnam, which are leapfrogging fossil fuels.

But in other sectors, energy transitions are more policy-dependent because the upfront CapEx is higher. So, policy is determining whether companies can afford that investment or whether the payback is quick enough given the relative prices of electricity and gas. Look at sectors like steel and cement. We have solutions, but they're still first-of-a-kind, so the cost hasn't come down. Therefore, we need the right kind of policy support.

When engaging in discussions between industry and policymakers, what kind of support do you want to see from regulators to make it easier for corporations to do the right thing?

Again, you have to be sector-specific and, since we are talking about regulation, region-specific. We should recognise where the technology is at. Is it at an early stage where it’s not making money and it needs support in the form of capital grants, or are you in the rapid uptake phase, like EVs are?

Like everything, investing in climate solutions is a judgement call. If you are in the steel sector, for example, and you are not investing in some low- or zero-carbon steel technologies, odds are at some point you are going to be outflanked by your competitors.

We saw this in the car industry. European carmakers thought Tesla couldn’t make cars; now they are begging regulators to slow down the transition. The problem is, the competition is not slowing down. If you’re not on the learning curve, you are giving a head start to competitors in a race that is going faster and faster.

You said the driver of the energy transition is now national security. Now, in the context of the Middle East crisis and the closure of the Strait of Hormuz, as bad as that obviously is, is there a silver lining? Could this contribute to the energy transition?

It may, although we often have short memories. The Ukrainian invasion does not seem to have instilled a sense of urgency towards the transition.

When we talk about security, most people think about supply. But in such a globally interconnected market, supply is very difficult to truly disrupt. The real issue is price. The major emerging markets understand this. If you look at ammonia, China, India, and Brazil, for example, are all very keen on moving to green ammonia because their fertiliser has now become a lot more expensive. And that’s a food security issue.

Emerging markets are very aware of the price risk. Europe doesn't seem to have learned the lesson yet.

You have, in previous opportunities, talked about what you call an ambition loop. What is it?

Often we hear people say we should leave something to the market or that only policy can fix something. I feel both of those simplifications to be unhelpful. The path of our energy systems, of our whole economy, is an interplay between what business does and what policymakers do. Both respond to each other. Policymakers are also thinking about risk. Will we be reelected? Will businesses like what we do?

That’s the ambition loop: when you see a lot of businesses investing, talking about what's working for them and how it's benefiting their business, that opens up the political space for policymakers to be more ambitious.

 It’s not just what businesses do that is important, but also what they say. On a narrative level that there's a feedback loop too. Iif everyone believed oil was gonna be at $200 a barrel for the next 20 years, then every CapEx decision would be to go towards renewables. We act on what we believe is gonna happen in the future.