for, | October 27, 2021

Decarbonization by the Numbers (with Michele Della Vigna)

Bringing the global economy to “net zero' won’t come cheap. Goldman’s Michele Della Vigna (Carbonomics) explores the true costs of decarbonization.

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AZEEM AZHAR: Hi there, I’m Azeem Azhar, and you’re listening to the Exponential View podcast. And as regular listeners to this podcast, and readers of my newsletter will know, I’ve been tracking the climate crisis for the last several years. I’ve had conversations with everyone from clean energy entrepreneurs, to people working in decarbonization and carbon credits, to climate economists and investors. Now, today’s guest is someone whose work has really helped my thinking in this area. Michele Della Vigna runs a carbonomics research program at Goldman Sachs, the investment bank, and he’s been tracking the economics behind the transition to net zero.

AZEEM AZHAR: His work has been really helpful for me in understanding the cost of that ambition. He’s got an excellent understanding of the role of capital markets in steering decarbonization and the numbers behind humanity’s greatest challenge. We spend a bit of time talking about global carbon markets and carbon pricing. That’s the concept that governments can attach a cost to carbon pollution to incentivize greener behavior from polluters – effectively to embed the externality of that pollution into the prices that firms face in the market. I want to define another term of art that we use, “carbon abatement,” that means reducing the amount of carbon dioxide produced from a particular industrial activity. Now on the show! Michele Della Vigna, welcome to Exponential View.

MICHELE DELLA VIGNA: Hi, Azeem, thank you for hosting me.

AZEEM AZHAR: I’ve been reading your carbonomics research for a couple of years now, and I’m just curious as to how it came about.

MICHELE DELLA VIGNA: So at the beginning, I used to follow the energy industry, and one big question for me about three years ago was how the big oil and gas companies could change into broader energy companies that were consistent with society’s aspiration to stay well within two degrees of global warming. And so I started to look in depth at how the energy industry had to change, in terms of decarbonization. And then I thought, “This is more interesting than just energy, than just [inaudible 00:02:06],” and so starting to expand it. And ultimately, I thought, “This is about decarbonization. But I’m not going to analyze the political or so much the social aspect of it. I want to start with the economics of it.” And that’s why the series was called carbonomics – effectively, what are the economics of reaching net zero carbon in a way that is affordable, financially efficient, and that leads us to the maximum clean-tech innovation?

AZEEM AZHAR: And in the most recent update of your reports, which was a September 21 [2021] report, I noticed that you had scenarios, not for two degrees centigrade, but for 1.5 degrees centigrade by 2050. So there was some kind of shift that has taken place in your thinking over the last couple of years. What’s driven that?

MICHELE DELLA VIGNA: I think there’s definitely a shift for society as a whole to look beyond the original aspiration of the Paris Agreement, which was to stay well within two degrees scenario, to staying within one and a half degree scenario. And all of the work that the IPCC [Intergovernmental Panel on Climate Change] has done clearly shows that there will be material benefits in staying within one and a half degrees scenario, materially reducing the risk of the worst outcomes of climate change. It’s challenging, and we do show it in our analysis, it requires a tremendous amount of momentum in global policy and coordination, which I am not entirely sure is there, which is why it is a scenario, an important one, but a scenario. I personally find the well-below two degrees scenario to be probably more realistic given where global politics are today. But I really wanted to show a broader range to make the point that we all like to talk about net zero, but net zero can mean many things. And to give you an idea how different they are, the one and a half degrees scenario, as a carbon budget, net CO2 [carbon dioxide] emissions from now, or 500 gigatons, the well-below two degrees scenario has 750 gigatons — so 50 percent more budget, which as you can see, would mean that there is a much different path to net zero in that case.

AZEEM AZHAR: It is inspiring that we can start to have a conversation that is not a two-degree change, but a 1.5-degree change, and just over the course of a few years. You’ve identified that perhaps the politics is not creating that momentum. But what are the aspects that allow people like you and others to say, “We do have a pathway, even if it’s a bit tougher to 1.5.”

MICHELE DELLA VIGNA: I believe there’s three main levers. The capital markets, the consumer, and global politics, mostly through carbon pricing. And when I look at the world today, I believe the capital markets are extremely engaged, mainly because of the rise of sustainable investing. And that, I think, I will call it an engine that is running at full speed and that is aiming towards one and a half degrees. The consumer, I think, still has a relatively small action, mainly because the transparency is not there. Today, if you buy goods, you have the right to know if it’s food, the calorie nutritional content, but you don’t have the right to know the exact carbon footprint. And that, I believe, is a missed opportunity to leverage on the consumer and its pressure to achieve decarbonization. Then finally, there’s politics, which in some ways are clearly moving forward. But I still don’t see the global coordination, especially on carbon pricing, that I think is needed to have more confidence that we stay well within two degrees.

AZEEM AZHAR: On that question of the capital markets, one of the arguments that has been made over the last few years has been that, as investors move increasingly towards ESG-based investments – that is wanting to put their funds into companies that adhere to those higher standards, it becomes more expensive for other companies who don’t have those standards to get capital. Essentially, if you want to build a coal plant, you borrow money at a much higher interest rate than if you want to build a solar plant, and that then gets reflected in where the investments actually occur. Do we have data as to whether that’s actually happening? Is there a sort of a negative premium now if you’re a dirty energy producer?

MICHELE DELLA VIGNA: Yes, we’ve done analysis. And if I look back to 10 years ago, whether a company was developing oil, gas, or renewable power, the cost of capital was broadly similar – somewhere between eight and 10 percent. We estimate that since then, the cost of capital for oil has risen to almost 20 percent for long-cycle developments. And for renewable power, it’s fallen to between three and five percent. There is an extraordinary divergence in the cost of capital, which is what really is leading to this unprecedented shift in capital allocation where renewable power will be the largest area of energy investment in the world for the first time in history. But we can also try to translate this into an implied carbon price from investors. And we estimate that to be somewhere between $80 and $100 per ton, which is quite an extraordinary amount, if you bear in mind that today, the global average carbon price is only $5 per ton. So investors are effectively applying in their long-term capital allocation, something close to 20 times what is today’s average carbon price in the world.

AZEEM AZHAR: I think this is a really important point, because it’s often been the argument that’s been made, which is that capital markets are going to be really essential in their ability to price these different investments. Why are they actually insisting on a higher return from fossil fuel based investments? I mean, capital markets often don’t move from the goodness of their heart, there must be something driving it, some fundamental maths or risk.

MICHELE DELLA VIGNA: You’re absolutely right, I think that clear fundamental maths is that in a net-zero scenario, let’s say a one and a half degree scenario, there will be substantially lower demand for hydrocarbons in the longer term, and that therefore fewer projects should be developed. And the way you guarantee that fewer projects get developed is by applying a hurdle rate, so that a smaller amount of extremely profitable project goes ahead, and everything else effectively gets rationed away. This is a powerful mechanism. And I believe, by the way, it’s a very helpful mechanism, but it has limits, and the key limit is that capital markets mostly impact the supply side of things, and so the financing of new projects to develop energy, but has limited impact on forcing a shift in consumer habits, which instead have to come from government, and to a large extent from the carbon pricing mechanism. And because the two things are acting in a very disjointed way, the risk is that we don’t develop a lot of oil and gas, but at the same time, we don’t shift the demand fast enough, and what we get is energy tightness, like what we’re seeing at the moment, which is… I would almost call it a form of revenge of the old carbon economy, where that tightness leads you to a transition through higher energy prices. Now, that’s not necessarily irrational. And that may actually ultimately accelerate the path to net zero, but it does create issues of affordability as we’re seeing at the moment.

AZEEM AZHAR: Right. And then of course, that in a sense can create some political risk because politicians don’t want to be the ones who made Christmas expensive and cold for you.

MICHELE DELLA VIGNA: Exactly. But to be clear, we don’t think this issue of affordability comes from the cost of renewable and low carbon solutions, or from the carbon pricing we’re seeing in regions like Europe, we believe it comes from this dislocation and this underinvestment in an orderly transition in areas like, for instance, natural gas. And if we want to have an orderly transition, we need to have investment in natural gas. And I think somehow that element of transition has been missed out.

AZEEM AZHAR: When we look at this question of the implied carbon price, you’ve said that the capital markets are putting this implied price of $80 to $100 per ton, that’s actually not far off the implied social cost of carbon from the Stern report, it’s well above where European ETS prices on carbon are today, which I think are in the $50 to $60 range, and you said the global average carbon prices around $5 right now. So carbon pricing seems important, but in a way the market is broken, because the pricing is all over the place. How do we move from the point that we are today? What does that transition look like? I mean, at some point, we’ll have a global carbon price, but what in your mind are the steps that need to take place between here and there?

MICHELE DELLA VIGNA: The reason why the global average is only $5, is because over three quarters of global emissions are not taxed, or priced at all, zero price for that externality. Now, the key problem of carbon markets today is one, they’re very inconsistent, and they’re very regional. And two, there is no mechanism of border adjustment in place today, which makes sure that there is a level playing field across countries. And so if Europe applies the carbon price, it can also tax at the border for the import of carbon intensive good and equivalent for the emissions that a good created. This is a problem, and that’s why I believe a good border adjustment mechanism is the first key foundation to have better coordination between carbon prices globally. And then I do think that the major global economies should coordinate on a path towards consistent carbon pricing. The issue here, I think, mostly lies in the United States for a very simple reason, that in the United States, the low-income consumer is very carbon intensive, which would make carbon pricing highly regressive from an income distribution perspective. Let’s be clear, this can be solved in a mechanism for instance of carbon tax and dividend where the money raised gets given back to the low income consumer to avoid that regressive nature. But it certainly all makes it more politically difficult to structure and to get it approved.

AZEEM AZHAR: That is a wrinkle and nuance that I hadn’t appreciated, because normally, the discussion that we see around global carbon prices and border adjustments tends to revolve around the Chinese consumer or the Indian consumer who have observed consumers in the West get rich on the back of carbon output. And actually, to get the US on board, we need to tackle a domestic redistribution challenge.

MICHELE DELLA VIGNA: There will always be an income distribution challenge in any kind of tax, and this is no exception. It can always, through redistribution, be structured in a way that is progressive, but it makes matters just more complicated.

AZEEM AZHAR: So one part then of carbon pricing relates to getting the markets to work and dealing with some of these domestic political questions, but there are also these political questions between nations around carbon prices. How do you imagine sort of a structure would emerge for that? How do we tackle the question that is often raised about the poor and lesser developed countries and their ability to ride a development curve without being able to necessarily access the carbon pollution richer countries were able to access?

MICHELE DELLA VIGNA: So I think the first way in which this can be addressed is by laying out the framework for countries to share the carbon abatement if one finances the decarbonization of the other. Let’s make an example. The be EU finances, for instance, in Brazil, reforestation and solar projects, which have an implied low-carbon price, let’s call it $10 to $20 per ton, and which decarbonize a certain amount of emissions. How does the EU and Brazil share it in that case? There is no clear global framework for that, this is what the so called Article Six of the Paris Agreement still need to address and hopefully COP26 will provide an answer for that, because this could be a great mechanism for countries which are very advanced in the decarbonization and where the marginal abatement is extremely expensive to use some money to help abate a lower-income country, which sits lower on the cost curve and share that then. It’s important that there is no double counting, so the sharing has to be clear and needs to lead to 100 percent, not more than that of the emissions being abated. But this could be an interesting mechanism to ensure, first of all, a financially efficient decarbonization because the lower part of the cost curve gets addressed first. And secondly, better income distribution with wealthier countries subsidizing low-income countries. There’s also another form of carbon pricing which doesn’t get talked about that often, but which is very important, which is the global voluntary offset market. This is not one of those regional markets where you’re forced to pay for the carbon emissions, but it’s something that can be used on a global voluntary basis for companies to be able to accelerate their carbon transition by buying offsets, mostly linked to reforestation. And that allows them to have net zero goods and finance development projects of low carbon in emerging markets.

AZEEM AZHAR: We are going to see over the course of the next 30 years, a very, very large transition, perhaps 100 percent, perhaps 90 percent, to renewable, non-carbon types of energy. What does that mean for the oil super majors?

MICHELE DELLA VIGNA: For these companies to be consistent with a net-zero path and the agreement with Paris, what they need to do is shift their business towards renewables. And by the way, renewables isn’t just renewable power, right? It can also be renewable fuels by using waste, by using natural products, by using recycling and the circular economy, by using hydrogen, and in some cases by using carbon capture associated with a more traditional use of hydrocarbon. So there are really many avenues for decarbonization. And I think the key is to create ecosystems where the circular economy, renewables, hydrogen and carbon capture work together to decarbonize industry, transport, buildings, and agriculture. And I think that’s where the integrated nature of the big oil and gas companies could really become a key asset to help switch towards net zero and go into the transition path. I think it will take at least three decades to go through that transition, mostly because big oils are exposed as a customer base largely to industry and transport, which are two of the tougher and harder to abate industries. But I do think that it is achievable through these new technologies. And in some places, through the use of carbon removal through nature based solutions, and through carbon capture.

AZEEM AZHAR: One of the fascinating parts of your work is that you’re looking out three decades alongside deep consumer shifts, but also technological innovation. And so carbon capture, and storage, or direct air capture, which is the technology to take carbon dioxide out of the atmosphere, sequester it through some chemical or electrochemical mechanism and then store it somewhere or reuse it is a very nascent technology. It’s not something that we have run at the kind of scales we need to run it at. Even renewable storage, the storage systems that we need, we can store hundreds of megawatts of ours, but not the grid scale storage that we expect to have. So there are a lot of uncertainties in both innovations that we need to develop and innovations we need to scale up. As an analyst who’s looking out at that, what assumptions do you make in your modeling about these sort of unproven trump cards?

MICHELE DELLA VIGNA: As EMA could not agree more that we will be surprised by the extent of technological innovation the moment the right financial incentives are there. My sense is some of those that you’ve mentioned will become [inaudible 00:19:41] in a net-zero world. I believe, direct air carbon capture, synthetic fuels where you can take the captured CO2 and green hydrogen and reverse engineer any hydrocarbon byproducts. Fusion could become interesting as kind of the next generation of nuclear like technology, but without the issues of nuclear waste and safety. So I think all of these elements will play a major part in the path to net zero. And we compete to some extent also with each other. In the meantime, I think we know these technologies are not ready to be deployed in large scale this decade. And that’s why probably this decade, the focus will be on other technologies that can be grown in scale. But it’s important that we innovate on these frontier technologies so that they are ready when we need them, most likely in the 2030s and ’40s, to reach affordable net zero.

AZEEM AZHAR: I noticed in your power generation decarbonization chart that there’s a sort of implicit assumption about nuclear not growing very significantly, and there’s no line for fusion because we haven’t managed to get fusion to sort of work, even in the lab. So when you look at something like that, and let’s look at those sort of nuclear related technologies, do you think that there is a possibility that that curve could shift significantly?

MICHELE DELLA VIGNA: Yes, there is a chance that this meaningfully shifts our cost curve. And we expect to be surprised each year by how dynamic it is, I would say, or nuclear. Bear in mind that we believe in a net-zero world, the amount of power demand will triple because of the needs of electrify, mobility, and industry. And so even if the market share of nuclear is not growing, still we do assume that there will be a material increase in the total amount of nuclear to service the system. We don’t think there’s a lot of political and public support in a lot of countries, which is why we don’t see it gaining market share. But if fusion was to be developed in an economic way, and without the issues of safety and nuclear waste, I think that could become bigger, and substitute some of the more marginal renewable development. Because remember that although solar and wind are extremely attractive, they also are quite intensive in the use of space, which in some countries is not a problem. But ultimately, there will always be a limit, and an issue with intermittency.

AZEEM AZHAR: I think there’s something so interesting in this point that the amount of energy that the system is going to require will triple over the next 30 years, And it may be even more than that, because one of the beauties of having a lot of energy is that we can create these closed-loop systems, you can burn a synthetic eFuel that puts out CO2, and then you can use clean energy to take that CO2, create a higher hydrocarbon to push it back in as a synthetic eFuel. And we can essentially throw clean energy at industrial problems to get the materials or the inputs that we need. So you could imagine energy demand rising even faster than a tripling, in order to maintain net zero, and to maintain a quality of life that our economies have been providing us.

MICHELE DELLA VIGNA: Absolutely. Cheap, zero-carbon power is absolutely key in all of this, and it’s absolutely key in carbon capture, which is a very energy intensive process, which is why it does require material development of renewable power before we can see directly carbon capture really become economic.

AZEEM AZHAR: One of the things I’m curious about is how the power system structurally shifts. Today’s power system is a very industrial value chain, get stuff out of the ground, refine it, add value to it, distribute it, take it to a place, burn it, take the heat, push that heat past the turbine to create electricity, stick it down a grid, and then it powers my iPhone at the end, and it goes one way. But of course, the renewable-based grid looks a lot more complex, there’s a lot more back and forth. There’s the fact that it’s nighttime and now my solar plant’s not producing anything and perhaps we need to take power back off the batteries in our cars. Is that a hard infrastructure shift or is that sort of a software and a process shift?

MICHELE DELLA VIGNA: It’s both. And in the $56 trillion of infrastructure CapEx that we estimate will be needed to go to net zero, there’s a material amount that needs to go into complete upgrade and rethinking of the power networks. And you need more hardware there, more connections for these distributed grades, but you also need a digitalization of the grid. To the point where everything that is not necessary in terms of consumption at that point in time gets decided and optimized by the grid to minimize cost and improve, effectively, all of the demand management that can be done, gets done, including when you recharge your electric vehicles, when you run your dishwasher, etc., on one side. Then on the other side, I think the grid needs to contain more energy storage, but industrial scale batteries for the management within the hour, and green hydrogen for the management between seasons. Think of a net-zero world where most of the heating in winter is done by heat pumps, that will mean that in some countries winter demand for power could be 50 percent, even 100 percent higher than in the summer. If you just have renewable power generation, how do you transfer that power from the summer to the winter? One way to do it is through hydrogen. And a major green hydrogen economy would mean that in the summer you generate an enormous amount of green hydrogen, and then some of it you use in winter. Now, the economics needs to work, but I think energy storage in upgrade of the power grid with digitalization and more and better connections, all of that will be needed for a net-zero power system that is perfectly reliable, and that supplies three times the demand we have today. What a challenge, but what an exciting challenge.

AZEEM AZHAR: And it’s a $56 trillion challenge, and you threw the number out very casually. And when I read it, the $56 trillion, my immediate response was, “Hey, that doesn’t seem too much.” And then I shared that with some friends and their eyes bulged. Help us understand what $56 trillion means in the context of the economy and the levels of investment that are typically made?

MICHELE DELLA VIGNA: It will mean that at the peak of spending, which we believe is the 2030s, it will reach two and a half to three percent of global GDP, which is a material number, not an unthinkable one. If you look back at the beginning of the century, the amount of infrastructure CapEx for the urbanization of the [BRICS 00:27:04], for instance, was broadly similar in terms of scale and impact and what is required here. But let me be very clear on what that number contains. It’s just infrastructure CapEx, it’s all incremental, it’s only to achieve net zero. And so it doesn’t include OpEx, it doesn’t include financing, it doesn’t include just maintenance of the existing system. So it’s a meaningful number that needs to be mobilized, and I think the best way to mobilize it is, first of all, to make sure that the decarbonization regulation is clear across all sectors. Because right now, let me give you an example, when I look at for carbon intensive global sectors, with uncertain future regulation, energy, shipping, materials, and mining, we are seeing those industries reinvesting today 40 percent less than they’ve done in the last decade. This is a missed opportunity to mobilize profitably this CapEx towards that $56 trillion opportunity. But the reason why it’s not happening is that these companies don’t know what the regulation will be for the future, and they could continue to do business as usual. But then the risk is those carbon assets become stranded, or they could try to go for a net-zero solution, but that’s not profitable today, and may not be profitable for many years to come. In doubt, they delay the investment. This is the missed opportunity.

AZEEM AZHAR: It’s really an important observation that the lack of clarity will do nothing but delay a board making a capital investment, and therefore, you get the unbridgeable moment between the old world and the new world. I’m curious about another dynamic that may be taking place. I don’t know if this is real or not, but as the factory price of renewable power, these long-term PPAs, power purchase agreements, is declining, how do they affect the profitability of those projects? I mean, do we end up in a slightly awkward situation where actually it’s harder to fund large scale renewable programs, because there’s an assumption that there’s going to be a kind of constant decline in the price, and so perhaps, power buyers don’t want to sign up for 30-year contracts like they might have done?

MICHELE DELLA VIGNA: I think this is a very important point, because in a deflationary sector, you get an incentive to delay decision and [inaudible 00:29:27] as a consumer. I would say three things here. So the first one is you’re absolutely correct, the amount of cost deflation in solar and wind has been enormous, right, between 70 percent and 90 percent, according to how you look at it. We actually think it’s substantially slowing down, so the cost of equipment has stabilized. The other thing I would say is one third of that cost deflation actually came from lower cost of capital, and it’s not clear that there is further deflation to come through that. So my sense is, the cost of renewable power is actually starting to stabilize, which should provide an incentive to the customers to take advantage of these and sign long-term PPAs. Without long-term PPAs, it’s difficult for the smaller players, especially, to go ahead with new developments. But it could still be possible for more integrated players, like the larger integrated utilities or oil and gas companies to use their balance sheet and risk management capabilities to develop some of these on a merchant basis. So my sense is, we could see a bit more merchant, but otherwise, I think the incentive for PPAs has come back with, I think, less clear cost deflation in the long term, and also to be fair, power prices going up everywhere on the back of the tight gas market.

AZEEM AZHAR: So let’s switch on to other sources and other sectors, what is a potential for abatement in sectors like construction or industry and how different does abatement look in those industries?

MICHELE DELLA VIGNA: So abatement in industry and construction is complex. It’s complex, it’s expensive, but it can be done. I think there is an element of electrification that can be done across industry and construction, and which is relatively straightforward. Then there is an element of hydrogen, especially for extremely high heat processes, or actually processes that need hydrogen, like primary steel production. Then there are some processes which either because you want to salvage the plant, which is relatively new, or because it’s a chemical process itself, like cement, and the classification process there that just emit CO2, you want to add carbon capture, like a scrubber at the end of the process that takes the CO2 and either uses it or store it. These are the three key avenues to decarbonize industry. But this requires a clear regulatory framework, including carbon pricing. I think it requires collaboration, because some of this requires common infrastructure. And so collaboration between different industries, especially around the mega industrial hubs, and I think it does require a substantial technological innovation. I am very confident this can be done. And I think as we learn to do it in scale, we will find out that it becomes cheaper over time as we’ve discovered it with renewable power.

AZEEM AZHAR: Yeah, it’s really interesting that we come back to these two dynamics. One is the importance of having a stable regulatory regime, and the second is the confidence that we have in innovation. And if we look at this question of innovation, the thing that strikes me is the number of different players that are required. I mean, just think about the polyester and the nylons and the plastics that we use, they’re all polyethylene. And I think a large part of the oil that comes out of the ground is not burned to power our cars, it’s actually polymerized to turn into the things that we sit on, and the clothes to wear.

AZEEM AZHAR: When you think out this next 20 or 30 years, do you think that it is largely going to be clean versions of the existing processes? So for example, we’re going to be doing this polymerization process, but we’re going to capture the carbon at the other end to make it a zero-carbon footprint activity. Or do you think it’s more likely to be novel approaches like bio plastics and bio polymers that are emerging out of startups of different types?

MICHELE DELLA VIGNA: So, maybe boringly, I think the answer will be both. I do think that there is clear need for more efficient processes as we know them today. And in some cases, I think the use of hydrocarbons can continue, like in the use of plastics, for instance, with proper industrial processes, ultimately, the CO2 is captured in the material produced and not combusted into the air. But also, I think, at the same time, we need to test new materials, especially around the circular economy. And it’s about using nature to generate those materials, the bio chemicals and bio products you were talking about. It’s about recycling existing plastic, through physical but also through chemical processes like pyrolysis to be able to make sure that we can continue to reuse the plastic in the system. Then I think there could be completely alternative solution, like paper packaging, in some cases can be used. And I think we need all of this in order to be able to fully decarbonize the economy. But that’s where I think technological innovation would be important. And that’s where I actually also think if technology agnostic carbon pricing can offer better incentives to really think about surprising and different solutions, rather than governments just effectively telling us that they support a specific technology. And I think the example you made to plastic is one of the most fascinating ones, because there are so many alternatives that could be used to decarbonize.

AZEEM AZHAR: So you largely deal with the public markets and that tends, therefore, to mean capital required for scaling or for financing large projects. What do you think is the role of those markets in supporting these innovations that are going to be clearly required, perhaps one business cycle away, from now?

MICHELE DELLA VIGNA: I think, like every innovation, the market needs to believe it’s required, and that’s where we kind of go back to policy and the clear commitment from governments to go to net zero. My sense is, the capital markets are focused on sustainability and net zero, they will reward companies that they think have a profitable proposition to help the world get there. But I do believe we need a better regulatory framework, especially on a global basis, to make sure that these technologies will be required and will be profitable in the path to net zero.

AZEEM AZHAR: You’ve made a clear point that we need global consistent carbon pricing, the benefit is that then policymakers are not betting on specific technologies. Rather, there is a traditional contest of technology market suitability, team execution, that will determine the technologies that emerge that we end up using, and provided the carbon prices is consistent, then that should all work as it has historically for markets to generate appropriate innovations. What is required beyond there being an agreed globally consistent carbon price? What are the systems that we would need to build for that to be not merely a price, but a price that is complied with well, and enforced well, and ultimately the revenue is raised appropriately?

MICHELE DELLA VIGNA: Carbon pricing, I believe, would be the clearest mechanism to incentivize that. But it’s not necessarily the only one, there’s many other regulations which can help decarbonize, and which ultimately can be translated into an implied carbon price. What I find fascinating is that sometimes, in my discussions I mention that clean hydrogen or carbon capture may require between $100 and $250 per ton of CO2 pricing to be economic, and the feedback is “Oh, my God, that price is so high.” Look today, the European, yes, is only at $80 per ton. And my pushback is, “Look, there’s a lot of decarbonization legislation which actually implies even higher carbon pricing than that. The forced blending of sustainable aviation fuel has a cap implied carbon pricing of around $700 per ton. Some of the electric vehicle incentives have an implied carbon price between $500 and $1,000. The incentive Germany gave 10 years ago for solar that implied a carbon price of $1,000 per ton.” So I think we need to start learning that there are many kinds of carbon pricing, some are explicit, but some are not. And yet, they’re all instruments of the decarbonization. And I think we need to understand it to be able to compare technologies and solutions on a like-for-like basis and avoid the bias. Because I think in some cases, there is a clear bias for some technologies, I think, especially for electrification, and against other areas of technologies like hydrogen, clean hydrogen, carbon capture, circular economy, which are equally important, but which sometimes get less generous incentives.

AZEEM AZHAR: There is a risk of corporate capture and message capture of the policymaker. So you make something look sexy like electric vehicles, and you’re able, through that mechanism and storytelling, to effectively get a policy that has a much higher implied carbon price. And there might be a much harder but less glamorous area, whether it’s waste reprocessing, or cement manufacturing, or circular economy, which can’t capture the public imagination, therefore can’t capture the policymaker’s imagination, and therefore you don’t get the same level of implied carbon price and we don’t then make the progress in those areas.

MICHELE DELLA VIGNA: I think it’s fair. Industry is the area where the risk is highest. The solutions are not sexy from a political perspective because they feel too abstract to the consumer. I think it’s easy to explain why an electric vehicle is better than internal combustion engine man, it’s much more difficult to explain to the public why you want to add a carbon capture system to a cement plant or why you want to switch steel to hydrogen as a production method. But those are equally important, and that’s where I think policy needs to progress and innovate.

AZEEM AZHAR: Michele, we are recording this just before COP26 gathers, what are the big commitments you would like to see coming out of it? And what are the ones you think could surprise us to the upside?

MICHELE DELLA VIGNA: So let me start from the laughter. I think what we surprise to the upside is what all of the corporates and the shareholders are pushing for, and how much of a commitment there is from them, including their commitment to the voluntary carbon credits, their commitment to decarbonization paths to one and a half and well below two degrees scenarios, and also to the commitment to provide better information to the consumer to help them make a better choice on decarbonization. What I think will be more complex is a global framework on carbon pricing, I would love to see that, I doubt we will see coming out of COP26. And also, although I think almost every country will upgrade their targets of decarbonization, both in the near and in the long term, and almost everybody will commit to net zero under some framework, probably between 2050 and 2060 for all countries, I do wonder whether there will be a real political agreement to commit to stay within one and a half degrees. I don’t think we will get that commitment on any unanimous level, but that upgrade will be a powerful message that investments in decarbonization will be needed and profitable in large scale over the next one to two decades.

AZEEM AZHAR: Well, Michele, we will find out in due course. I’m really grateful for all the work you’ve done with carbonomics over the last couple of years, it’s great reports to read, they give a new perspective for me. And thank you so much today for taking the time to chat.

MICHELE DELLA VIGNA: Thank you, Azeem, it’s a great discussion. As you can see, I’m very passionate on the topics and looking forward to continuing it in the future.

AZEEM AZHAR: If you’ve enjoyed this discussion, please check out our podcast where you can listen to previous discussions with Kate Raworth, an economist and senior associate at Oxford University’s Environmental Change Institute. She’s also the author of the best-selling, Doughnut Economics, and Michael Liebreich, the founder of Bloomberg New Energy Finance. Both of these conversations tackle similar economic and systems questions around the path to net zero, although from different perspectives.

AZEEM AZHAR: To become a premium subscriber of my weekly newsletter, go to To stay in touch, follow me on Twitter. In the US, I’m @azeem, A-Z-E-E-M, and elsewhere, I’m @azeem, A-Zed-E-E-M. This podcast was produced by Mischa Frankl-Duval, Fred Casella, and Marija Gavrilov, the executive producers. Bojan Sabioncello is our sound editor.