Allianz SE board member Günther Thallinger recently spoke with noted American environmentalist and author Bill McKibben about the need to take meaningful action to make the planet safer and more sustainable. They shared a sense of urgency regarding the speed with which the transformation to renewable energy has to take place to avoid irreversible climate change.

As the unprovoked attack on Ukraine continues – despite the humanitarian catastrophe and the world asking for an end – the global economy’s dependency on fossil fuels has come into question even more.

The imperative to significantly reduce emissions of harmful climate gases in order to keep the world livable has now been given additional impetus by geopolitical developments: namely, to reduce or end dependence on dictatorships or authoritarian regimes as soon as possible. Allianz Board member Günther Thallinger and U.S. author Bill McKibben discuss what policymakers and the private sector must do now.

A “fateful moment”

McKibben, leader of the climate campaign group 350.organd author of The End of Nature (1989), said: “The world has been given a stark argument for the switch to renewables. Although fossil fuels were identified as the source of the climate crisis decades ago, humanity has been painstakingly slow in transitioning to a low-carbon society.”

In 2019, before consumption changes caused by the COVID-19 pandemic, fossil fuels still accounted for 84% of the world’s primary energy consumption. But now that energy dependencies are adding pressure, the geopolitical situation could provide a sense of urgency to accelerate the adoption of clean energy and explore new, alternative sources for fossil fuels.

“Scientists and the engineers have done their job – they've dropped the price of renewable energy 90% in the last decade,” McKibben said. The challenge is now less technical than political. “The question is, how do we keep forcing this transition?” he added.

McKibben pondered how the different facts concerning climate change and the perils of dependency on petrostates could be fashioned into policy that grapples realistically with the need for fast action. There are two pressing timescales, he explained. “For Europe, it means ensuring that there is energy to heat people's homes next winter. According to the IPCC , this decade is crucial for the planet: We have to cut emissions by 50% until 2030, which is only seven years and ten months from now.” He added. “I don't think we've dealt with these questions as seriously as we should in the past.”

Finance as a lever

McKibben stated that changing investment patterns was a critical lever to the net-zero carbon future. While acknowledging Allianz has made significant steps to move away from investments in fossil fuels, he challenged Thallinger as to why the insurance industry continues underwriting new projects for the fossil fuel industry given the existential challenge climate change poses for the planet.

“How to change away from fossil fuels is critical,” Thallinger responded. “Leading insurers have made 1.5 degree commitments for their investment portfolios, including short-term commitments to change their portfolios (editor’s note: UN-convened Net-Zero Asset Owner Alliance with targets for 2025). Today, most insurers have a position on fossil fuels and are screening every fossil fuel project against sustainability criteria. I expect that soon the leaders – for example, the members of the net-zero alliances – will require transformation pathways compliant with 1.5 degrees from companies – also companies from the Oil and Gas sector.”

Günther Thallinger is chair of the UN-convened Net-Zero Asset Owner Alliance (AOA), an organization of 71 asset owners with more than $10 trillion in assets under management. The members are committed to transitioning their portfolios to net-zero greenhouse gas (GHG) emissions by 2050. He acknowledged that financial institutions have a pivotal role in rapid decarbonization and emphasized the complexity of an orderly transition away from fossil fuels, especially when it comes to social matters.

A “just transition” to a low-carbon economy involves minimizing disruption for workers and communities, especially in developing regions where oil and gas will continue to be essential elements in the energy mix for some more time. Therefore, engagement with fossil fuels industries is essential to ensuring an orderly transition.

“If the energy supply is disrupted to those who need it and consume it,” Thallinger said, “people will react. What many fear is those individual contributors to the world’s complicated energy network start to depart.”

The AOA has signaled members are willing to face short-term effects on portfolios by investing long term. However, Thallinger argued that companies could not achieve a transition to a low-carbon future alone. What is also essential is for governments to set explicit policies to help steer the transformation.

Thallinger said financial institutions could provide the finance necessary to transition together with state-owned funds. “There is no hurdle to implement this. The vehicles are tested, everything is there. But what is really necessary is to understand how energy provision for an entire country will look in ten- or 20-years’ time for entire countries. For developed regions, such as the EU, this is pretty clear. Here, it’s about the ways to get there, the short- and mid-term legislation needed to achieve this 2030, 2040 vision."

Time to pivot subsidies

Economists have long argued that a well-designed carbon tax is the most economically efficient way to reduce carbon emissions. McKibben believes a carbon tax is unlikely to happen in the United States because of political hurdles. But, given the increasing urgency for action, it is more important to have strong governmental action behind a build-out of renewable energy.

The AOA has called on governments to end subsidies that support fossil fuels, distort energy markets and fuel the climate crisis. The organization supports programs to ensure a market-based carbon price, believing that the transition to a low carbon, renewable energy-driven economy is hindered – if not made impossible – by fossil fuel companies not having to face the cost of not changing.

“I fully subscribe to the point that an economy based on renewable energy is more cost-efficient and, therefore, in competitive terms, superior,” stated Thallinger. “The question is, how to kickstart the acceleration needed for this transformation?”

The International Energy Agency (IEA) and the Organisation for Economic Co-operation and Development (OECD) have estimated that 52 advanced and emerging economies – representing about 90% of global fossil-fuel supplies – gave subsidies worth an average of US$555 billion each year from 2017 to 2019. The question is whether the current political reality meant these subsidies could be pivoted to the renewable energy  sector. 

McKibben said that politicians are happier “giving money to things than taking away money from things.” He explained that with Build Back Better, President Biden’s signature climate legislation, moribund in the US Congress, the fallback has been to allocate US$500 billion in tax credits for clean energy.

“In essence, that’s a subsidy for doing the right thing. It's within one vote in the US Senate. This would be an enormous, enormous change. And people are working extremely hard to make it happen. Figuring out what's politically possible at all times is the key. We're at a moment when the political reality is more up for grabs than usual.”

Rewriting our sense of what is possible

The most hopeful sign we have about our ability to mitigate climate change is the speed with which the price of renewables is falling, McKibben said, “because it’s become apparent that it is beginning to rewrite our sense of what is possible.” In a recent Oxford University study, analysts found that each doubling of sun and wind generation capacity drives down the price of generating the energy another 30%, which translates to about a 10% decline every year.

Thallinger welcomes such developments but argues what is also required is orchestration by governments. This should create a level playing field on the basis of which individual asset managers or insurance companies compete.

“You have a first-mover problem,” responded McKibben. “In a perfect world, fully coordinated action would be the best possible outcome, and we'd all move quickly and smoothly to where we're going to go. But my observation is that that's rarely how things happen. It takes a willingness to lead.”

While understanding that no politician or CEO wants to move so far ahead that they lose their position, he emphasized a desperate need for action. “The science is clear that we're out of luck unless we dramatically transform this decade.”

Günther Thallinger summarized that this was the role the AOA was undertaking. The members have committed to transition their portfolios to net-zero and delivered a clear framework to turn ambitious long-term commitments into interim 2025 and 2030 targets to at least halve their emissions compared to 2020. The AOA also aims to create a virtuous cycle between the private sector and governments. Engagement can and should include meaningful dialogue with legislators focused on the rapid implementation of climate policy. The same approach of the AOA is now being replicated in insurance and by other financial service providers.

A shared sense of urgency

Throughout the conversation, McKibben and Thallinger shared a sense of urgency regarding the speed of transformation. From the recent IPCC report, 2030 is the decisive marker for meaningful action to prevent the devastating tragedy of irreversible climate change.

If it takes us until 2050 to address climate change, “it will be a broken world,” said McKibben. “The speed with which one has to work is the most important factor, and here we see that things might be possible no-one thought they were possible so far.”

Source: Allianz, Now is the time to vigorously advance the transformation to renewable energies (allianz.com)