We can have economic growth and protect the environment. The International Energy Agency just announced data which show that global carbon emissions flat-lined last year -- the first time in 40 years this has happened outside a recession. This may be the first sign that economic growth and growth in carbon emissions are finally decoupling -- thanks to China’s slow transition to a consumer-led economy and away from the dominance of heavy industry. Cheaper and more efficient renewables in the developed markets may also be making a contribution. If profit for investors is where the growth is, this shift argues that they should look carefully at renewables as an investment destination -- perhaps for decades to come.
The perennial environmental policy battle has been between advocates of growth and advocates of environmental protection. Growth advocates point out the benefits of growth to human welfare; environmental advocates point out the dependence of human welfare on healthy ecological systems. Some on each side have maintained that growth and environmental health can coexist -- but few in either camp have been convinced.
On March 13, though, the International Energy Agency (IEA) -- a European policy think tank -- announced its preliminary data for carbon emissions in 2014. For the first time in 40 years, carbon emissions were unchanged year-on-year, even though the global economy is not in recession. (Emissions have declined before, but never during a year when the global economy grew.)
Source: International Energy Agency
Until we see the data broken down further, it’s just speculation to try to determine why carbon emissions from energy generation are flatlining; but there are two basic possibilities.
One is that public policy is finally beginning to bear fruit. Support for renewables in the developed world, but also in China, has begun to tilt the balance of energy generation in the direction of carbon neutrality.
The other is that a technological shift is responsible. People aren’t turning incrementally to renewables only because of government intervention; they’re doing so because it’s finally beginning to make sense independent of government intervention. Solar is approaching grid parity in many markets even without subsidy, as we pointed out in this letter on November 26, 2014.
Until we have all the data, it will be impossible to say. However, we believe that the second trend -- ever cheaper and more efficient renewables -- will be the one that eventually brings about a decisive “decoupling” of economic growth and growth in carbon emissions. If there is a single augur for the fate of solar and wind generation -- both of which are in the midst of rapid technological transformation -- it is this decoupling.
The driver of per capita GDP growth is technology, but technology can’t operate without energy. From this perspective, energy is the key resource, and if we are indeed seeing the first signs that carbon energy is being dethroned as the main growth enabler, that will have profound investment implications for the coming decades.
Investment implications: According to the IEA’s preliminary data, 2014 marks the first time in 40 years that economic growth has not been accompanied by a growth in carbon emissions from energy generation. If this is indeed an indication that renewables have passed a crucial threshold, we view them as a fundamental component of a long-term investment strategy. They may not be attractive at current prices, however. In the present environment we suggest that tactical investors study Chinese solar companies and American renewable yieldcos as potentially attractive.