With COP26 underway, the discussion returns to how close each polluting nation can get to net-zero emissions (NZE) by 2050. This, the climate scientists suggest, is the only way to limit the pace of global warming to 1.5°C above pre-industrial levels this century. Not everyone is fully committed, but the general thrust is in this direction. Scientists are urging haste as global temperatures rise (Exhibit 1) at a rate that suggests the world is well on its way to breaching its red line of +2.0°C stipulated in the Paris Agreement (2015).

Naturally, there is real room for slippage given how far into the future these targets are. Given that the commodity economy is responsible for this predicament, it will also be the solution. Political intervention, fueled by public support, is ready to deconstruct before reconstructing the world’s commodity markets. All of this will happen in the next 20 years.

Exhibit 7. The current warming trajectory is well above +2.0°C ceiling set

- Source: Climate Action Tracker

Rushing to reduce

If the world is to get anywhere near to net zero emissions by 2050, then it must indeed rush (Exhibit 2). The change will be drastic. On paper, net-zero emissions entails the closure of all coal burn within the next 13 years; gas-fired generation would be gone by the mid- 2040s. Renewable generation must take its place – but only if we can commercialize the battery storage technology on time and scale. By ditching hydrocarbons and adopting electrification, global power demand will increase threefold by 2050. Every form of transport fuel will be changed utterly. Agriculture, long an exception to emissions reductions targets, must share the burden. The search for essential and technologically important metals needed for battery storage will accelerate. But so will questions over the environmental cost of doing so—time to get familiar with what a Life-Cycle Assessment* (LCA) entails. As the clock ticks on, the rush to decarbonize only will intensify. Less talk and more investment are needed if hydrogen is to become a reliable substitute for fossil fuels. If NZE is a serious goal, then much more time, more money, and more attention are needed.

Heavy costs.

Individuals and corporates will play an important role in tackling climate change, but it will be national governments that will cover the cost. The world must spend over and above 1.5% of GDP each year for the next 12+ years to right our path to net zero. Even at that, the payoff for the taxpayer is long-dated. But, regardless, that investment must be made now.

While the most likely outcome of the COP26 will be a reiteration of national targets already pre-announced and some collective goals, there is no predefined path for each nation to get to net zero. A lot of trial and error will take place. A lot of money will be spent. At the end of it all, there is no guarantee that after having bought a costly ticket the world will arrive at the right time and the right place.

..and hard choices.

The path to net-zero will create both winners and losers across markets and broader society. Governments must incentivize and penalize, nudge and compel. Hard decisions will be buffered by front-loading public spending to cushion the blow to the electorate. The environmental movement is both persuasive and motivated, and there is, for now, the political will for change. Yet, that core level of public support remains untested.

Exhibit 2. Fossil fuel dominated (94%) of our primary energy mix in 7965. Sixty years later, its domination (84%) remains unchallenged.

- Source: BP Statistical Review of World Energy

Unintended consequences.

The commodity economy is central to all emissions reduction strategies. Commodity markets move on the interaction between supply and demand. But, critically, emission reduction schemes introduce a third dynamic: direct market intervention. Intervention can and will distort commodity pricing. It is inflationary. It provides an outlet for politicians to disguise fiscal spending as environmental spending. It can be protectionist where trade barriers – in the form of carbon border taxes – are erected to keep ‘dirtier’ imports out. Governments are now more emboldened to distort the market forces of commodity supply and demand.

An immense upheaval is underway. Since there are no one-size-fits-all, then many countries will take differing approaches and pathways. Some will backslide; others will ‘decarbonize’ with haste. The transition, though, must be planned and communicated. Disruption and extreme periods of price volatility are guaranteed. What this will create is pricing dislocations across commodity sectors that are now more intertwined than ever before. Commodity markets are certainly going to be living in interesting times for many more years to come.

*Life Cycle Assessment (LCA): the environmental impact of each commodity is assessed beginning with raw material extraction-processing-transportation-consumption-waste disposal.

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