The first ever global stocktake – a report card on the progress that nearly 200 countries have made in reaching their climate goals – is reaching its conclusion as COP28 comes to a close. As a result, governments around the world are assessing their progress, learning from the past few years and adjusting based on those lessons.
While we already know the world is lagging on meeting the goals of the Paris Agreement, there are reasons to be hopeful about the current state of the energy transition. Early adoption and efforts to scale up renewable energy have made it cheaper than conventional energy. According to the IEA, global investment in clean energy is on course to rise to $1.7 trillion in 2023, outpacing spending on conventional energy. We have also reached a crucial tipping point for electric vehicles, which represented 14 percent of global auto sales in 2022. In 2023, electric vehicles are projected to represent more than 30 percent of new car sales in Europe and China.
This is meaningful progress and should continue. But what about heavy industry and hard-to-abate sectors – steel, fertilisers, cement, aviation, shipping – which account for 21 percent of global emissions? Or energy-intensive sectors, such as data centres, which represent more than 6 percent of emissions? Reaching net zero requires a whole physical industrial transformation, not just changes in where we get energy and road transportation. Yet there still remains a crucial funding gap to address all areas of the physical economy.
I spent most of my career in industry, where I oversaw the transformation of a global Fortune 500 industrial company into a leader in energy efficiency, decarbonisation and sustainability services. I decided to pivot my career to private equity because of the conviction that private capital will play an outsized role in the decarbonisation of the industrial economy.
Today, most of the private capital deployed in climate goes either to large scale renewables, already a mature industry with vast pools of capital dedicated to it; or at the other end of the spectrum, to a vibrant ecosystem of venture capitalists and growth equity funds focusing on clean tech startups, which are producing promising decarbonisation technologies, but have yet to scale up meaningfully to generate the large-scale impacts that will be required in the coming decades.
Where capital is needed most is precisely in the middle: in electrification, transportation, agriculture, energy efficiency and, importantly, heavy industry. For example, the steel industry, which accounts for 6 percent of global emissions, is now able to scale zero-carbon production with technology available at a reasonable premium. This will drastically eliminate the CO2 emissions embedded in a product that is so critical for many sectors of the economy. And the long-term economic case for green steel is positive, creating jobs and value for investors; although it is true that government regulation and support will be needed in the first few years.
Governments, which have understood that taxing up or regulating out carbon-intensive technologies is not efficient, are now enacting proactive transition policies focused on demand. After all, energy transitions have always been demand-led and never driven by supply or regulation. Those proactive policies – like the IRA in the US or the Green Deal in the EU – will help accelerate learning curves and de-risk investments in decarbonisation.
This should in turn catalyse the $200 trillion of capital – mostly private – needed to reach a net-zero economy by 2050. That is roughly $7 trillion per year for the next 27 years. To put this in context, that is roughly the equivalent of the GDP of Canada, France and Italy combined each year. This is a step change compared to the $1.7 trillion deployed in 2023.
We believe this new approach to demand-led blended finance between public and private sources will – as long as it focuses on businesses with relevant, significant and credible impacts on emissions reduction – fill this funding gap:
- First, by providing the capital to scale up existing decarbonisation solutions, including a dramatic increase in the development of renewable generation, energy storage and a decentralisation of the power grid, across developed and developing markets;
- Next, by scaling and commercialising newer decarbonisation solutions across all sectors of the physical economy, including EV charging, scaling the battery value chain, advancing the circular economy and deploying low carbon fuels;
- And, finally, by helping decarbonise harder-to-abate sectors within heavy industry (“brown to green”) by providing patient capital to support their transitions, including green steel, decarbonisation of transportation and logistics systems and decarbonisation of the agricultural complex.
Those investments come with other benefits, such as a manufacturing renaissance in mature economies and elsewhere. New well-paying decarbonisation jobs are being created in communities around the US and in Europe where industrial jobs had declined in the last generation.
With the combined efforts on the public and private sectors, we hope that by next year’s COP we can start to see similar trends in heavy industry as we do for clean energy and electric vehicles today, with benefits for the climate and workers around the world.
The author is Emmanuel Lagarrigue, partner and global co-head of KKR’s climate strategy.