Carbonomics - the Economics of reaching Net Zero

On industrial decarbonisation, carbon pricing, the adoption of cleantech and more

That is the title of a recent research publication by the CFA Institute & Goldman Sachs International, published in November 2024. (Here’s the full PDF - recommended reading)

I share quick notes from the paper, followed by my thoughts.

Notes from the paper

1. 3 challenges that have emerged in getting to net zero

   • rising hydrocarbon subsidies - reached $1 trillion in 2022

   • increase in coal consumption

   • to keep warming within the 1.5C limit as per the Paris Agreement, the climate targets of countries - the NDCs - need to rise by 54% (why?)

2. To reduce global GHG emissions by 75%, $3.2 trillion is needed annually - based on 2023 cleantech costs. The estimate has increased by $0.1 trillion from 2022, due to higher interest rates and lower price of conventional energy, especially natural gas.

   The weighted average cost of capital (WACC) for new renewable power projects increased to 6.0%–6.5% in 2023 from 4.0%–4.5% in 2022, driven by the increase in risk-free rates in Europe and the United States.

   (Also see my overview of IEA’s cleantech manufacturing costs report)

3. Estimated cost of carbon abatement in different sectors (2023 numbers)

   • power generation - $66/ton

   • transport - $422/ton (battery prices have fallen, but synthetic fuels and SAF are relatively more expensive due to decline in gasoline and jet fuel prices)

4. The estimated threshold for widespread adoption of Electric vehicles is an EV premium (difference in cost of EV and ICE vehicle) payback period of about 3 years.

5. Impact of the US Inflation Reduction Act, which came into force in 2022

   We estimate that CO2 savings from IRA incentives and induced investments to 2032 will amount to 22 gigatons, implying a $52/ton cost of CO2 abated to the US government…Incorporating US IRA tax credits and other incentives, the Carbonomics cost curve for the United States moves 75% lower.

6. Estimated carbon price for decarbonising heavy industry in Europe - €100–€130/ton. Also,

   We estimate that EU ETS auctions could generate €62 billion annually in tax revenue for the EU member states by the end of the decade.

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My Thoughts

1. The cost reduction in clean energy technologies seems to be driven by China, primarily because solar + batteries are the only solutions that have been scaled yet. This is going to change starting this year because

   1. solar + batteries cannot meet the rising energy needs of AI deployment, I expect countries will start building supply chains for small nuclear and advanced geothermal.

   2. further decreases in solar and battery prices will not mirror previous decline because China-based manufacturers are controlling production and the government is not approving new battery manufacturing capacity easily. Infact the restrictions on exports of critical battery minerals from China may actually cause battery prices to increase - caution for countries setting up and heavily subsidising onshore battery manufacturing.

2. Prices of conventional energy will likely remain highly competitive in the short-term, next 2-3 years, as output is increasing.

3. The introduction of ETS in the maritime sector will drive more deployment of hydrogen/methanol/ammonia powered ships. There are already commercial scale hydrogen engines for use in both transport and power generation (usually can work with both natural gas and 100% hydrogen). I expect this to become more competitive this year, especially with production-linked incentives for renewable hydrogen production in many countries (India, Australia).

4. There’s demand for SAF due to regulation - for instance, UK has implemented the SAF mandate from January 1 2025, but capacity is very limited. At least two large players - Shell and Ørsted - halted development of their SAF facilities in Q3 2024. Given that airlines are passing on the carbon tax/SAF costs to consumers - Lufthansa announced an additional surcharge between €1-72 depending on route and fare - I expect public pushback on SAF blending. Unlike for hydrogen, there are few regulatory incentives for scaling SAF production. Availability of agricultural feedstocks is one bottleneck here - for instance, maize prices in India are not sufficiently competitive to support scaling biofuel production.

5. Historically, carbon credits from nature-based solutions (afforestation etc) have been much cheaper compared to those from technology-based solutions, but have attracted much criticism and investigation due to poor quality and ineffectiveness. Monitoring, Reporting and Verification tech has improved in 2024, involving drones & AI for nature-based solutions, and AI-enabled sensors for other solutions like enhanced rock-weathering. Direct Air Capture will be even less competitive - Climeworks, the largest DAC company is working on a nature-based product - however membranes used in DAC are better and the cost per ton for DAC will also fall. (Here’s my post on understanding Direct Air Capture).

6. The above point, increased availability of cheap, high-quality carbon credits will make industrial decarbonisation even more difficult. Countries, like USA, have come out with industrial decarbonisation roadmaps, and EU has the renewable energy directives, but these are largely suggested best practices and not mandatory. To truly reduce emissions in supply chains, governments will need to announce regulation + subsidies to induce private sector investment. An interesting development is an RFP from India announced earlier this week - inviting industries to setup small nuclear reactors for their own use. How much interest is expressed by the private sector remains to be seen (the deadline is March 31, 2025).

7. Given the current geopolitical environment, and many companies softening sustainability initiatives in 2024, I expect EU CBAM implementation to be either delayed, or made less stringent. The delay in implementation of the EU Deforestation Regulation is one such example.

8. Carbon storage sites are largely in the feasibility study/permitting/environmental assessment phase. I expect sites to be in use by 2030, not before.

9. Based on announcements in 2024, low-carbon cement at scale will be a reality before emissions intensity reduces in other manufactured goods and industrial products. Here’s a recent announcement from Vattenfall

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Thanks for reading, have a nice day!

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