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LEVEL 15, THREE PACIFICPLACE, 1 QUEEN’S ROADEAST, HONG KONG
HOW SERIOUS ARE THE THREATS FROM CLIMATE CHANGE?March 2020
1+852 2295-1500MIRAEHKETF@MIRAEASSET.COM
LEVEL 15, THREE PACIFICPLACE, 1 QUEEN’S ROADEAST, HONG KONG
TABLE OF CONTENTS
1 How serious are the threats from climate change? 2
2
HOW SERIOUS ARE THE THREATS FROM CLIMATE CHANGE?
• Climate change is reshaping the energy industry
• The green electricity market is expanding
• The transport industry is ‘decarbonizing’
• Conservation is vital to solving the climate puzzle
• Hydrogen and biofuels will play an important role
Climate change is a dominant issue among policymakers, scientists and investors. It is re-shaping the future of the
energy industry through fi nancing, regulation, technological innovation and investor activism, with a seismic shift in the
global capital-allocation landscape.
There has been a particular focus on the persistently high temperatures and the frequency of natural disasters across the
globe, particularly in the past decade. While there is still debate on whether we can attribute an increase in the number
and severity of natural catastrophes directly to climate change, there is a general acceptance that the frequency of at
least some of these events, such as extreme heatwaves, fl ooding and wildfi res, correlate with global warming.
Various academic studies on the e� ect of climate change have tried to quantify the impact it has on world economies.
This research has utilized multiple approaches, with a recent report suggesting that changing temperatures could
reduce global GDP by 3–7% over the longer-term (with most of these forecasts up to Year 2100).
HOW SERIOUS ARE THE THREATS FROM CLIMATE CHANGE?1
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LEVEL 15, THREE PACIFICPLACE, 1 QUEEN’S ROADEAST, HONG KONG
TEMPERATURE CHANGE AND SEA LEVELS
Earlier research pointed toward variations of the impact of climate change on di� erent countries, with developed
economies seemingly less exposed to the e� ects of global warming, while emerging nations appeared more
vulnerable. However, recent studies have found that this is no longer the case. The new analysis is based on
current assessments of either temperature change or a rise in sea levels, which itself could be understating the
e� ect our changing climate has on economies because estimates have risen over time. A recent United Nation
climate report highlighted that escalations in global temperatures mean that extreme and rare oceanic events could
become more commonplace by year 2100, with low lying cities and coastal areas particularly at risk.
A RISE IN INCIDENTS
Natural-loss-related events are typically classifi ed into four categories:
Our research data suggests that the number of natural-loss incidents is rising by around 5%–6% per annum,
compared with the ten-year historical average of 2%–4%. Weather-related events are an essential driver: in 2018,
these accounted for approximately 90% of both the total number of natural hazards and the fi nancial losses from
such incidents. Moreover, weather-related damage has reached roughly USD $2.8 trillion in the past decade, which
is more than 30% above the cumulative losses seen in the previous ten years.
Geophysicalearthquakes,
dry mass movements and volcanic eruptions
Weather-relatedfl ooding and storm surges
Climatologicalheatwaves, droughts
and wildfi res
Meteorologicaltropical storms and
windstorms
4
HOW SERIOUS ARE THE THREATS FROM CLIMATE CHANGE?Te
mpe
ratu
re A
nom
aly (o C)
Conc
entra
tion i
n Par
ts pe
r Milli
on (p
pm)
FIG 3. MATERIAL INCREASES IN ATMOSPHERIC CO2 CONCENTRATIONS HAVE COINCIDED WITH HIGHER TEMPERATURE ANOMALIES
Source: NASA, NOAA, Morgan Stanley 21 Oct 19
Annual Avg. Temperature Anamoly (LHS) CO2 Concentration (RHS)
1880 1903 1926 1949 1972 1995 2018-0.6
-0.4
-0.2
0.0
0.6
0.4
0.2
0.8
1.0
265
385
365
345
325
305
285
405
425
FIG 1. THE FREQUENCY OF ABOVE-AVERAGE TEMPERATURES HAS RISEN SUBSTANTIALLY
Source: World Bank Group, Goldman Sachs 11 Dec 19
010%20%
40%30%
60%50%
80%70%
100%90%
FIG 2. THE NUMBER OF NATURAL-CATASTROPHE- RELATED LOSS EVENTS HAS INCREASED MATERIALLY GLOBALLY
Source: Munich Re-NatCatSERVICE, Goldman Sachs 11 Dec 19
% of months with average temperatures above long-time average Number of natural loss events globally
1901
-10
1911-
20
1921
-30
1931
-40
1941
-50
1951
-60
1961
-70
1971
-80
1981
-90
1991
-00
2001
-10
2011-
150
200
600
800
1000
1200
1400
1600
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
32%41% 40% 43%
52% 49%39% 41%
58%66% 70%
87%
5 year movinh averageGeographical eventsClimatological events Meteorological eventsHydrological events
CO2 emissions are at their highest levels in human history, reaching 53.5 gigatons (Gt) in 2017. This increase is being
driven by several man made factors, broader industrialization and the burning of fossil fuels, which have resulted in
steadily rising global temperatures. Based on average readings over the period 1951 to 1980, 18 out of the 19 warmest
years on record have occurred since 2001, with 2018’s temperature 0.8°C (1.44° F) above average.
5+852 2295-1500MIRAEHKETF@MIRAEASSET.COM
LEVEL 15, THREE PACIFICPLACE, 1 QUEEN’S ROADEAST, HONG KONG
PARIS AGREEMENT GOALS
An additional 1.5 billion people will inhabit the planet by 2040 – some 20% more than in 2018 – nearly a third
higher than today. This will bring unparalleled disruption. Studies suggest we could see the mass migration of up
to 200 million people globally over the fi rst half of this century, an additional one billion people could be at risk of
infectious diseases, and 20–30% of species may face extinction.
The Paris Agreement’s long-term temperature goal is to keep the increase in average global temperatures to within
2°C above pre-industrial levels; and pursue e� orts to limit the rise to 1.5°C, recognizing that this would substantially
reduce the risks and impact of climate change. Global greenhouse gas emissions need to be at or around net-zero
by year 2050 to halt climate change and achieve the goals outlined in the Paris Agreement. This means we must
move from 53.5 gigatone (Gt) of CO2 to zero by balancing the amount released into the atmosphere with that
taken out. It is more realistic than a gross-zero target but still extremely ambitious. Clear opportunities to reduce
emissions do exist, such as a rise in renewable power generation, the transition to electric vehicles, carbon capture
and storage (carbon sequestration), hydrogen, and the development of biofuels.
POWER GENERATION
Morgan Stanley estimates that global power generation capacity will expand by 3,900 gigawatts (GW) between
2017 and 2030, with almost all of this expected to come from renewable sources. The carbon intensity of power
generation should fall from 0.53 megatons (Mt) per terawatt hour (TWh) in 2017 to 0.35Mt per TWh in 2030. Total
global carbon emissions from power production are expected to fall by nearly 3Gt over the next decade, with the
mix shift enough to o� set the growth in overall demand for electricity.
FIG 4. THE MAJORITY OF INCREMENTAL PRODUCTION EXPECTED TO COME FROM RENEWABLE SOURCES
FIG 5. SOLAR AND WIND SHOULD ACCOUNT FOR OVER ONE THIRD OF TOTAL GLOBAL POWER GENERATION CAPACITY BY 2030
Source: Morgan Stanley 21 Oct 19
Renewable addtion (GW)
0
50
100
150
200
250
300
350
HydroOnshore Wind Solar
Other RenewablesO�shore Wind
2030
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2016
2017
2018
2019
2021
2022
2023
2024
2026
2027
2028
2029
2015
2020
2025
Source: Morgan Stanley 21 Oct 19
% Global Power Generation Capacity
0
5%
10%
15%
20%
25%
30%
35%
40%
2000 2003 2006 2009 2012 2015 2018 2021e 2024e 2027e 2027e
Solar aqnd WindCI
GasHydro
CoalNuclear
6
HOW SERIOUS ARE THE THREATS FROM CLIMATE CHANGE?
ZERO-EMISSION TRANSPORT
Decarbonizing transport, which is responsible for 24% of global CO2 emissions (29% in the US), is critical on the
path to net-zero emissions. Furthermore, batteries and fuel-cells also play a crucial role in the decarbonization
of power generation (responsible for another 42% of CO2 emissions). Although electric vehicles – both battery
electric vehicles (BEVs) and fuel cell electric vehicles (FCEVs) – generate zero tailpipe emissions, there are still
emissions from well to wheel, which take into account the emissions from the power source. Battery manufacturing
and the battery supply chain are now in focus, so original equipment manufacturers need to pay attention to where
and how the battery (and components) are made.
Take the UK, for example, where the annual driving range of 12,000 km consumed 1.7 megawatt hours (MWh) of
electricity in 2018 (including over 55% that came from clean energy), which resulted in 380kg of CO2 emissions.
This compares with 1.8 tons of CO2 per year for traditional vehicles when using the 119 gram/km emission target
for 2017 in Europe and another 7.5 gram/km from oil extraction, refi ning and delivery. With improvements in the
e� ciency of the battery supply chain and an incremental power mix that is considerably greener than the existing
combination, lifecycle CO2 emissions from electric vehicles will continue to fall. We estimate that there will be
an 8–56% reduction in CO2 emissions in battery pack production, making BEVs better than traditional vehicles
through the lifecycle in all regions.
FIG 6. BEVS OFFER THE BEST OPTION TO REDUCE CO2 EMISSIONS ON A FULL LIFECYCLE BASIS
Source: BP, EPA, Bernstein Mar 2019
US avg
ICE FCEV BEV-today’spower mix
BEV-incrementalpower mix
Europe 2021target
HyundaiNexo
Green/cleanH2
Greenelectricity
Global Global
224
US 2018adjustedemission*
184
123 129
20
9372
6
36% 48%
Clean power mix
100%
350
300
250
200
150
100
50
0
Life-Cycle Grams CO2 Emissions per km (for 240k km Life-Time Driving Range)
Battery/fuel cell Logistics for oil Driving
CO2 g
ram
/km
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LEVEL 15, THREE PACIFICPLACE, 1 QUEEN’S ROADEAST, HONG KONG
SOLVING THE PUZZLE
Two complementary paths will enable the world to reach net-zero emissions: conservation and sequestration.
Sequestration is critical to solving the climate change puzzle and achieving net-zero carbon emissions. The
conservation cost curve has a broader scope for low-cost decarbonization opportunities and a smaller range of
uncertainty but steepens exponentially beyond the mid-point. The sequestration cost curve, on the other hand,
o� ers fewer low-cost solutions and is more uncertain, but provides tremendous long-term potential if an economic
solution for direct-air carbon capture is developed.
While it is generally accepted that carbon sequestration is vital to achieving net-zero carbon emissions, the rate
of carbon sequestration technology deployment remains, to-date, sub-scale. Carbon sequestration e� orts can be
classifi ed into two main categories; natural sinks (natural carbon reservoirs that can remove carbon dioxide by, for
example, reforestation, a� orestation and agroforestry), carbon capture, utilisation, and storage technologies (CCUS).
Although carbon sequestration has seen a revival in recent years, it has not yet reached large-scale adoption
and the economies of scale that traditionally lead to a breakthrough in cost competitiveness, especially when
compared with other CO2-reducing technologies, such as renewables. Despite the vital role sequestration plays
in any scenario of net carbon neutrality, investment in carbon capture and storage (CCS) facilities over the past
decade has been less than 1% of funds allocated to renewable power. Although we see a defi nite upswing in CCS
pilot plants after this ‘lost decade’, we do not know where costs could settle if CCS attracts the similar economies of
scale as solar and wind. Most of the cost of carbon capture and storage comes from the process of sequestration
and is inversely related to the CO2 concentration in the air stream from which CO2 is sequestered. The cost curve
of CCS, therefore, follows the availability of CO2 streams from industrial processes and reaches its highest cost
with direct-air carbon capture and storage (DACCS), where the economics are highly uncertain (most estimates
are between USD 40 to USD 400 per ton), and only small pilot plants are currently operating. The importance of
DACCS lies in its potential to be almost infi nitely scalable and standardized, therefore setting the price of carbon in
a net-zero emission scenario.
8
HOW SERIOUS ARE THE THREATS FROM CLIMATE CHANGE?
FIG 7. THE CARBON SEQUESTRATION CURVE IS LESS STEEP VERSUS THE CONSERVATION CURVE BUT WITH A HIGHER RANGE OF UNCERTAINTY
Source: Global CCS Institute, Goldman Sachs 11 Dec 19
GHG emissions abatement potential
1,200
1,000
800
600
400
200
0
-200
Carb
on ab
atem
ent c
ost (
US$/
tnCO
2)
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52
Sequestration range of uncertainty Conservation range of uncertaintySequestration abatement curve Conservation abatement curve
FIG 8. THE CARBON SEQUESTRATION COST CURVE AND GHG EMISSIONS ABATEMENT POTENTIAL
Source: Global CCS Institute, Goldman Sachs 11 Dec 19
CO2 capture potential (GtCO2)
450
400
350
300
250
200
150
100
50
0
CCS c
ost p
er to
nne C
O2 se
ques
tere
d (US
$/tn
CO2)
0 1 4 6 8 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 362 3 5 7 9 10 11 12 13 14
12
3
Low cost reforestation, a�orestation & agroforestry
Natural gas processing CCS
Fertilizer & chemicals production CCS
4
Iron & Steel
56
78
9
Bioenergy CCS (BECCS)
10
Direct Air Capture (DACCS)
Medium cost forestry (A/R, agro)
High cost forestry (A/R, agro)
Coal PC CCSIGCC CCS
NGCC CCS
Cement CCS
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HYDROGEN WILL PLAY A KEY ROLE
Clean hydrogen is not a commercial technology that contributes to decarbonization. However, it o� ers a material
opportunity to reduce carbon emissions in industrial processes, mobility, and utilities. The Hydrogen Council, an
independent industry association, was launched in 2017 by a group of energy, transport and industry companies
(including Air Liquide, Alstom, Engie, Daimler, GM, Honda, Shell, Statoil, and Linde) to help hydrogen facilitate the
energy transition. The Council’s vision is for hydrogen to account for 18% of fi nal energy demand by 2050, which
would imply a tenfold increase in demand (to 550 million tons per year) and the creation of an industry with $2.5
trillion of global revenue (from hydrogen and related equipment).
FIG 9. HYDROGEN COULD REDUCE ANNUAL CO2 EMISSIONS BY 6GT IN 2050
Source: Hydrogen Council Morgan Stanley 21 Oct 19
Power generation bu�ering
Building heatand power
Transport Industryenergy
Industryfeedstock
Total
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
CO2 avoidance potential 2050, Gt
10
HOW SERIOUS ARE THE THREATS FROM CLIMATE CHANGE?
VIABLE BIOFUELS
Biofuels currently represent around 3% of global transport fuel demand and provide a low carbon solution for the
continued use of the combustion engine. They are made from biomass materials, most commonly in the form of
liquid fuels, such as ethanol and biodiesel, and are usually blended with petroleum fuels (gasoline, diesel and jet
fuel), but are sometimes used on their own. Biofuels are generally considered both renewable (they depend on
renewable feedstock sources) and sustainable (they burn cleaner than fossil fuels). Currently, they are the only
viable replacement for petroleum transportation fuels as they can be utilized within legacy internal combustion
engines. Biofuels are also technically feasible for use in the aviation and marine markets, but the availability of
suitable fuels is still low.
FIG 10. ETHANOL MAKES UP ~70% OF TOTAL BIOFUEL MARKET GLOBALLY
FIG 11. DECARBONIZATION POTENTIAL OF BIOFUEL
Development of the biodiesel and ethanol market Biodiesel C02 emissions
Source: OECD, Morgan Stanley 21 Oct 19
BIN
L
0
60
80
100
120
140
160
180
40
World biodiesel production World ethanol production
1998 2001 2004 2007 2010 2013 2016
Source: International Food Policy Research, ICCT, Morgan Stanley 21 Oct 19
GHG
emiss
ions
(gCO
2 eq
uiva
lent
per
MJ)
0
20
40
60
80
100
120
Direct emissions Indirect emissions
Firstgeneration
Palm Oil Soybean Rapeseed Sunflower Usedcooking oil
Animalfats
biodiesel
Algalbiodiesel
Fossil fuels
Second generation
Thirdgeneration
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