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HOW SERIOUS ARE THE THREATS FROM CLIMATE CHANGE?March 2020

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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



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.



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


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



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


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



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


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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